Confused by some of the industry jargon? Here are some common terms and what they mean.
AMORTISATION PERIOD The time taken to repay a debt, including accrued interest, in full through regular repayments.
BASIS POINTS Refer to a common unit of measure for interest rates and other percentages. One basis point equals 0.01 per cent. For example, 50 basis points equal 0.50 per cent.
BREAK COSTS OR PREPAYMENT FEES May be charged if you switch loan products, make additional repayments to your fixed rate loan or repay your loan in full during the fixed rate period. It is important to ask your lender if these fees will apply to your loan, and to understand if and when they would be payable.
BROKERS Many Australians use mortgage brokers (sometimes called finance brokers) to help find the most suitable home loan. Brokers can offer you a variety of loan options and help you select a loan and manage the process through to settlement. They often receive a commission from lenders for arranging the loan, and may sometimes charge you directly. You should always consider your personal circumstances, and it is wise to shop around.
CERTIFICATE OF TITLE Documents the ownership of or interest in land. It provides a description of the land, proprietorship and shows any registered interests such as mortgagees, charges and caveats. It also shows any restrictive covenants and easements which affect the estate or interest.
COMPARISON RATE A single percentage rate figure that takes into account the interest rate and most fees and charges associated with the loan. The comparison rate can help you to compare the true cost of a loan between lenders.
CONTRACT DEPOSIT A deposit that is required to be paid when the contract of sale is exchanged. The contract deposit, usually 10 per cent of the purchase price, is held by the real estate agent in a trust account until settlement. If you do not proceed with the purchase, the contract deposit will not be refunded. The remainder of the purchase price is paid on the day of settlement.
CONTRACT OF SALE (OR OFFER AND ACCEPTANCE) The written agreement detailing the terms and conditions for the sale of a property.
CONVEYANCING The legal process where the ownership of a property is transferred from one party to another.
CREDIT REPORT A file that is kept by a credit reporting agency which shows a person’s credit history. Banks and financial organisations refer to credit reports when considering applications for loans and credit cards. A person with a poor credit history may find it difficult to obtain a loan or a credit card.
DEPOSIT The amount you contribute to the purchase of your property. This can come from many sources including savings or equity in another property. Your loan will make up the remainder of the purchase price. For example, if your property is valued at $500,000, and you have saved a 10 per cent deposit of $50,000 you will need a loan of $450,000.
EQUITY Homeowners often talk about how much equity they have in their house. Property investors often talk about how much equity they have in their portfolio. This is the value of the property (or portfolio) over and above the amount they owe on their loan(s).
FIRST HOME OWNER GRANT The First Home Owner Grant (FHOG) scheme was introduced on 1 July 2000 to offset the effect of the GST on homeownership. State Governments provide financial grants to purchasers of first homes, to assist in meeting purchase costs. Eligibility criteria applies, and grants vary by state.
FIXED INTEREST RATE Fixed interest rate loans lock your monthly interest repayments at a set rate for a period (typically one, three or five years), after which they will revert to the standard variable rate. They can be a good choice for buyers who want certainty around interest payments, but beware of break costs or prepayment fees if you try to change your loan or want to make additional repayments.
LENDERS MORTGAGE INSURANCE Lenders mortgage insurance (LMI) is insurance taken out by the lender and provides a safety net to the lender in the event that you, the borrower, default on your loan repayments. The cost of the insurance premium is usually added to your loan and paid off along with the rest of the loan. With LMI, a lender may accept a smaller deposit than the 20 per cent usually required, which can get you into your home sooner.
LOAN AGREEMENT A formal contract between you and a lender which sets out the terms and conditions of your loan.
LOAN-TO-VALUE RATIO The Loan-to-Value Ratio (LVR) is the proportion of the loan amount to the lender’s valuation of your property. If your property is valued at $500,000, you put down a deposit of $50,000 and require a loan of $450,000, the LVR will be 90 per cent (calculated as $450,000 ÷ $500,000 x 100). If your LVR is higher than 80 per cent, your lender will usually require that LMI be obtained for the loan.
MORTGAGE A legal document between a borrower and a lender. A mortgage gives the lender a conditional right to the property that is held as security for the repayment of the money that has been lent.
MORTGAGOR The person who owns the property and gives the property to a lender as security for a loan.
MORTGAGE DUTY Mortgages may attract duty based on the amount secured by the mortgage. This duty is usually paid to the applicable state authority on your behalf by your lender and added to your loan. The rate and amount of duty payable varies in each state and territory.
MORTGAGE PROTECTION INSURANCE This covers your loan repayments if you fall sick, suffer an injury or lose your job. If you die prematurely, the loan will generally be paid off. Policies differ widely and can be a combination of life insurance, income protection and permanent disability insurance. This is not the same as LMI.
NEGATIVE GEARING Borrowing money to invest where the return from the investment is less than the borrowing costs. For example, the rental income from your investment property is less than the interest payments on the loan used to purchase the property. OFFSET ACCOUNT A mortgage offset account is a bank account that is linked to your home loan. The savings in your bank account reduces the balance of your loan on which interest is calculated. This reduces the amount of interest you will be charged and can assist you to pay your loan off sooner.
OFF – THE – PLAN Buying a property off-the-plan means signing a contract to purchase an apartment that has not yet been built. You will be able to view building and design plans but there is no physical property to inspect.
PRINCIPAL This is the outstanding balance owing on your loan on which interest is typically calculated and charged. Generally, your regular home loan repayments will consist of principal and interest components, gradually reducing the amount owing on your loan. With interest-only loans, only the interest is paid each month, leaving the original principal outstanding at the end of the loan term.
REDRAW This is an optional feature on certain home loans that allows access to any additional repayments made on your home loan. If you redraw funds from your home loan, your outstanding balance will increase.
REPAYMENT FREQUENCY Refers to the regularity of loan repayments over a period of time which you must make as indicated in your loan agreement. Repayment frequencies are generally weekly, fortnightly or monthly.
REVOLVING CREDIT OR LINE OF CREDIT A flexible ongoing loan arrangement that allows you to borrow within a specified and agreed credit limit. Typically, the line of credit account will also be used for everyday transactions. Interest is added to the loan each month, and repayments are not necessary while the loan is within its credit limit.
SECURITY Security for a loan refers to the asset(s) a lender can claim against if you default on your loan. For home loans, it usually includes the property being purchased.
SERVICEABILITY Your capacity to meet loan repayments based on your income and expenses.
STAMP DUTY (ON A PROPERTY PURCHASE) Also known as transfer of land duty, transfer duty and conveyance duty. When you buy property in Australia, you are generally required to pay stamp duty to the relevant state or territory government. The amount varies between each state and territory, and is based on the market value of the property or the purchase price. Exemptions and concessions may apply in some circumstances. Check with your conveyancer to see if you are eligible.
VARIABLE INTEREST RATE If your loan has a variable interest rate, the interest charged on the outstanding balance of your loan may increase or decrease in line with the official cash rate set by the Reserve Bank of Australia. Lenders may also change your regular loan repayment amount based on changes in the interest rate. Lenders do not have to track changes in the cash rate and you should make allowances for higher-than expected increases.
