Finance Glossary - Common Terms & Definitions

Amortising loan

An amortising loan is one in which the principal and the interest of the loan is paid down through set payments over the life of the loan. Amortising loans are the most common types of loans written in Australia.

Application fee

This fee is paid by the customer for setting up the loan.

Approval in principle

An initial step in getting a home loan where the lender estimates how much the customer can borrow based on the information they have provided. Final approval occurs after a more rigorous process is followed.

Average Annual Percentage Rate (AAPR)

See comparison rate.

Basis points

Each basis point is equivalent to 0.01%. Therefore, a 1% increase in interest rates is equal 100 basis points.

Break cost

Fees charged by the lender if the loan is paid-off in full early by the customer.

Bridging finance

Bridging finance is a temporary loan or facility that is often used when buying a new home before selling the old home. As the name implies, bridging finance is a short term loan.

Comparison rate

A rate which includes fees and charges so loans can be compared on equal footing. For example, a loan with a low advertised rate but high fees might cost the borrower the same as a loan with a higher advertised rate but low fees. In this case, both loans would have the same comparison rate.

Conveyancing

The process of transferring the legal title of a property between the seller and the buyer. This usually requires a third party known as a conveyancer who is trained in all aspects of property law.

Credit limit

The maximum that a customer can borrow under their agreement with the credit provider.

Credit report

A report containing information relevant to the credit history of the customer. Credit reports are prepared in Australia by Veda Advantage and Dun & Bradstreet.

Debt Service Ratio

Percentage of the customers income that is used to service the loan.

Deposit

An amount of money that the customer contributes to the purchase of a house.

Deposit

An amount of money that the customer contributes to the purchase of a house.

Drawdown date

The date that the customer first accesses money from the loan.

Equity

The value of the property minus any outstanding loans related to that property. For example, if you own a $500k house and have $100k remaining on your mortgage, then your equity is $400k.

First Home Owner Grant

A grant given to first home buyers by the Australian Federal Government.

Fixed interest rate

A loan with a fixed interest rate is one where the interest is set at a fixed level for a specified length of time.

Government charges

Include stamp duty, transfer and mortgage registration fees. Because they are often imposed by state governments, these charges vary from state to state.

Guarantee

Where a third party (the guarantor) agrees to take responsibility for the loan if the original borrower is unable to pay.

Honeymoon rate

A low interest rate offered at the start of the loan for a set period of time. After the honeymoon period is over, the loan returns to the standard rate.

Interest only loan

A loan where the customer only pays off the interest on the loan but not the capital.

Introductory rate

See Honeymoon rate.

Lenders Mortgage Insurance (LMI)

Insurance taken out by the lender to protect itself if the customer is unable to pay off the loan. Generally the customer has to pay for the Mortgage Insurance if they borrow more than 80% of the home’s value. Mortgage insurance does not offer any protection to the borrower.

Loan agreement

A legally binding contract between the lender and the customer containing the terms and conditions of the loan.

Loan to Value Ratio(LVR)

The value of the loan divided by the value of the property that the loan is for. If this value is greater than 80%, then lenders mortgage insurance may have to be taken out.

Low doc loan

A low-documentation (Lo-doc) loan allows self-employed people to gain loans due to the reduced need for income documentation. The trade-off is that the interest rate for these types of loans is higher than that of a standard loan.

Lump sum payment

A one-off payment made to the loan, outside of the set repayments.

Monthly service fee

A fee charged each month while the loan is in progress.

Mortgage

A method of using a property as security for a loan. If the customer defaults on repayments the property can be claimed by the lender.

Mortgage insurance

See Lenders Mortgage Insurance.

Mortgage offset

A way of reducing interest repayments by linking the home loan to a savings account. The money in the account ‘offsets’ the principal of the loan. Then, interest is calculated on the remaining amount.

Mortgagee

In the case of a home loan, the bank is the mortgagee.

Mortgagor

In the case of a home loan, the customer is the mortgagor.

Non-conforming loans

Loans designed for customers who cannot satisfy the requirements of standard loans. See low doc loans.

Official cash rate

The interest rate set by the RBA.

Ongoing fees

See monthly service fee.

Overdraft

Occurs when withdrawals from an account exceed the balance.

Parental leave

Some loans allow new parents to take a short break from repayments.

Portability

To be able to transfer the loan from one property to another with the new property to be used as the security for the loan.

Pre approval

See approval in principle

Principal

The amount remaining to be paid on the loan. Interest is then calculated based on the principal.

Progressive drawdown

Some loans allow the loan amount to be withdrawn in smaller amounts rather than in one big hit. Progressive drawdown suits customers building a house because the entire amount is not needed at once.

Real rate

See Comparison rate.

Redraw

Allows the customer to make withdrawals from the loan, given that they have made additional repayments.

Refinancing

Obtaining a new loan usually with better interest rates or conditions. The old loan is paid up and the debt is transferred to the new loan.

Repayments

The amount of money agreed to be paid by the customer at agreed dates.

Security

An asset used to back a loan. For example, a property is used as security for a home loan.

Settlement

The tasks required to finalise the sale of a property.

Split loans

Loans which can be split across different accounts. One example is to have part of the loan with a fixed interest rate and the rest with a variable rate.

Stamp duty

A state government duty paid by the buyer when a property is sold. Stamp duty varies from state to state.

Sub-prime lending

See non-conforming loan

Sub-prime lending

See non-conforming loan

Term

The length of the loan.

Upfront fee

Fees that are charged by the lender to process the loan application.

Variable interest rate

An interest rate that can vary over the life of the loan. Variable interest rates can rise and fall according to global economic conditions.