Home loan glossary

Posted by Date Added : 07/08/2012

Home loan glossary
This glossary is supplied to help you understand the “jargon” often used in the banking/lending industry.

Home loan term(s) Description
Application fee A fee paid by a borrower for setting up a loan.
Approval in principle
(or pre approval)
Initial approval process which provides an estimate of how much you can borrow (before finding the property), based on the information you have provided to the lender.
Basis points One basis point equals 0.01% interest. For example, 35 basis points equals 0.35%.
Bridging finance A loan/facility that can be used when buying a new home before selling an existing home. Bridging finance is generally temporary/short term.
Comparison rate A rate which includes both the interest rate and most fees and charges payable during the life of the loan, expressed as a single percentage figure. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included and may influence the cost of the loan.
Conveyancer A third party hired by the buyer/seller to represent them to facilitate the conveyancing process.
Conveyancing The legal process of transferring ownership of property from the seller to the buyer.
Credit limit
(or facility limit)
The maximum loan amount that a borrower can borrow under their home loan contract.
Credit reference or credit report A report, prepared by an authorised credit reporting agency that shows the credit history of a borrower. A lender needs permission from the borrower to obtain a credit report.
Deposit guarantee A substitute for a cash deposit to assist with the purchase of a property. The buyer is required to pay the full purchase price at settlement.
Drawdown date The first time the borrower uses the loan funds, for example, to pay the vendor.
Economic costs (or break costs) A fee which may be payable if, during a fixed rate period, the borrower makes certain changes such as switching the loan from a fixed to variable rate or fully prepaying the loan prior to the expiry of the fixed rate period. Economic cost is the lender’s estimate of its loss resulting from the change.
Equity The portion of an asset that is owned (e.g. the value of the property less any outstanding loans secured by the property).
Facility agreement
(or loan agreement)
The formal contract between the borrower and the lender which sets out the terms and conditions of the loan.
Facility limit
(or credit limit)
The maximum loan amount that a borrower can borrow under their home loan contract.
First Home Owner Grant (FHOG) A Federal Government grant given to first home buyers.
Fixed interest rate Your loan’s fixed interest rate will stay the same for the fixed rate period. This means your repayments won’t change during the fixed rate period.
Government charges Refers to various charges payable to the government/s. Examples include stamp duty and transfer and mortgage registration fees. Amounts vary for each State and Territory.
Guarantee A promise by a third party to meet a borrower’s payment obligations if they are unable to pay.
Guarantor The third party who is providing the guarantee for the borrower.
Honeymoon rate A low interest rate offered at the start of a loan. At the end of the specified time period the interest rate converts to a standard variable rate.
Interest in advance When interest is charged at the beginning of a period of time. For example, charging the first year’s interest in the first month of a loan. It is generally only available on fixed rate loans for investment purposes.
Interest in arrears Interest charged at the end of a period of time, generally the end of the month.
Interest only loan The borrower only has to pay the interest that is accrued on the loan and no principal payments for a specified time period.
Introductory rate A low interest rate offered at the start of a loan. At the end of the specified time period the interest rate converts to a standard rate.
Investment loans Loans used for investment purposes, such as the purchase of an investment property.
Lenders Mortgage Insurance (LMI) Insurance taken out by the lender to protect itself from default by the borrower. Generally required for home loans with a Loan to Value Ratio (LVR) above 80%.
Line of credit A fully functional transaction account that has a credit limit attached to it. The borrower can generally withdraw funds at any time, up to the credit (or facility) limit. (If the credit limit is attached to more than one account, the borrower may only be able to draw up to the account limit on each account.) There is usually no fixed repayment schedule; however, the borrower is usually required to make payments to at least cover the interest and fees on the loan.
Loan agreement or facility agreement The formal contract between the borrower and the lender which sets out the terms and conditions of the loan.
Loan to Value Ratio (LVR) The total amount of the loan divided by the appraised value of the property. For example, if a property is valued at $400,000 and the loan amount is $320,000 then the LVR is 80%.
‘Low Doc’
(documentation) loans
A loan process generally for self-employed people who do not have the standard financial statements required to obtain a loan.
Lump sum payment An extra repayment made to a loan, outside of the scheduled repayments.
Monthly service fee A fee which may be payable each month on a loan account. The fee varies depending on the type of loan.
Mortgage A document which creates a security interest over a property to a creditor as security for a loan.
Mortgagee A person who holds a mortgage as security. For example, if a bank holds a mortgage, the bank is the mortgagee.
Mortgagor A person who gives a mortgage. For example, a borrower who provides a mortgage over their house as security for a loan is a mortgagor.
100% offset Helps reduce interest costs on a loan by linking the loan to a transaction or deposit account. The balance in the transaction account ‘offsets’ the loan principal. Interest is then calculated on the loan principal minus the balance in the account. For example, if the principal on the loan is $200,000 and there is $10,000 in the transaction account, then interest is only calculated on $190,000.
Portability The ability to ‘move’ a loan from one security (e.g. property) to another. For example, borrowers can usually take their current loan with them when buying a new home by swapping the security held on the loan to the new property.
Pre approval
(or approval in principle)
Initial approval process which provides an estimate of how much someone can borrow (before finding the property), based on the information provided to the bank.
Prepayment Additional payment(s) made to a loan, in addition to the scheduled principal and interest repayments.
Prepayment fee Applies to fixed rate loans. A fee is payable when the whole loan amount is prepaid during a fixed interest rate period. It may also be payable when partial prepayments are made.
Principal The amount owing on a loan. Interest is calculated on the principal.
Principal and interest loan (P&I) A loan where the repayments are made up of principal and interest.
Property value The value of the property as determined by the lender – usually by referring to the property’s purchase price, engaging an external valuer or doing an internal valuation of the property.
Rate Lock Allows a borrower to lock in the fixed interest rate that is quoted at the time of loan approval for up to 3 months. If interest rates change prior to the loan drawdown date then the borrower is guaranteed the original rate (provided the time between approval and drawdown is within the 3 months). A Rate Lock fee may be payable.
Redraw A loan feature that allows the withdrawal of funds from a loan, if the borrower has made additional repayments.
Refinancing Paying off an existing loan and establishing a new one.
Repayments The amount that the loan contract specifies must be paid at an agreed frequency (e.g. fortnightly or monthly).
Repayment holiday If a borrower is ahead in their repayments, they can apply for a break in making loan repayments.
Security The asset used to secure repayment of a loan. For example, a property.
Settlement The completion of the process to sell or purchase a property.
Split loans Splitting a loan into more than one loan account. For example, a fixed rate loan account and a variable rate loan account.
Stamp duty Government duty. For example, stamp duty is payable by the buyer on a transfer of land when a property is sold. The amount varies for each State and Territory.
Switch fee A fee payable to the lender when switching from one product to another e.g. from a variable rate to a fixed rate
Term The length of a loan. For example, 30 years.
Valuation The value of a property as determined by the bank or an independent valuer.
Variable interest rate Your loan’s interest rate could move up or down. If interest rates change, your minimum repayments could too.
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