Meaning of Terms
Understanding the complex terminology associated with mortgages so that you can confidently make informed decisions about your mortgage, negotiate with lenders, and ensure that you are getting the best deal possible.
A.
Amortisation period: Also known as the loan term. It’s the agreed length of time that a borrower has to repay a loan. It’s set during the application and approval process.
Application fees: The fees a lender charges to set up the loan. It’s generally to cover the lender’s internal costs.
Appraised value: The estimated value of a property being used as security for a loan.
Appreciation: The increase in the value of a property.
Arrears: An outstanding or overdue amount.
Assets: Money, property or goods owned.
Auction: A public sale where a property is sold to the highest bidder.
B.
Body corporate: All the unit owners within a strata building. The owners elect a council responsible for the management of the building and it’s common areas.
Breach of contract: Breaking the conditions of a contract.
Break costs: Penalty charges for ‘breaking’ or ending a fixed term loan before the agreed date.
Bridging finance: A loan used to cover the finance gap that can happen when a buyer purchases a new property before selling an old one. Higher interest rates are usually charged for this form of finance, and it has to be paid back after an agreed time.
Building inspection: An inspection generally carried out prior to the purchase of a property to ensure the building is structurally sound. Contracts of sale can be made subject to the satisfactory building inspection.
Building regulations: Legal or statutory rules set up by a local council to control the manner and quality of buildings in it’s jurisdiction. The rules are generally designed to ensure public health and safety as well as acceptable standards of construction.
Building society: A financial institution owned by its customers or “members”. It offers banking and other financial services, especially mortgage lending.
C.
Capital gains: The financial or monetary gain obtained when an asset is sold for more than its original price.
Capital gains tax: A federal tax on the monetary gain made on the sale of an asset bought after September 1985. The tax does not apply to the gains made on the sale of an owner-occupied residence, so it generally applies only to investment properties.
Capped loan: A loan where the interest rate cannot exceed a set level for a period of time but, unlike fixed rate loans, can fall.
Caveat: A caveat lodged upon a land or property title indicates that a party, that is not the owner, claims some right over or interest in the property.
Certificate of Title: A record of all current information relevant to a particular property or piece of land, including:
- Current ownership details.
- Any registered encumbrances or caveats.
- Lot or plan details.
A lender usually holds this document as security. Once the loan is fully repaid, the Certificate of Title is returned to the borrower.
Chattels: Chattels are items of personal property, such as clothing, appliances and furniture. In real estate terms chattels are usually movable items which may be included in the sale, such as furniture.
Commission: The fee or payment made to a real estate agent for services.
Contract of Sale: A written agreement outlining the terms and conditions for the purchase or sale of a property.
Conveyance: The transfer of property ownership and changing the title of a property from the seller’s name to the buyer’s name.
Conveyancing: The legal process for the transfer of ownership of real estate.
Cover note: A guarantee of temporary property insurance before the implementation of a formal policy.
Credit: Borrowed money or other finance to be paid back under an arrangement with a lender.
Credit union: A cooperative which operates similarly to a bank, but is owned and controlled by people who use its services.
Creditor: A person or organisation who is owed money.
D.
Debtor: Someone who owes money to someone else.
Deed: Another word for title. It’s a legal document that states all information regarding the ownership of a property or piece of land.
Default: Failure to abide by the terms of a mortgage or loan agreement – such as not making loan minimum required repayments. Defaulting on a loan may result in financial penalties and, in extreme cases, the mortgage holder taking legal action to repossess the mortgaged property.
Deposit: An amount paid by the buyer at the time of exchanging the contract for sale. It acts as a commitment to buy. Normally a minimum of 5-20% of the total purchase price is required.
Deposit bond: A guarantee from a financial institution that a deposit will be paid to a seller. It’s useful for buyers with savings in a term deposit because it can be offered at the time of exchange – instead of a cash deposit. Which means the buyer doesn’t have to break the term deposit and lose any interest accrued. The buyer must pay the full purchase price of the property, including the amount of the deposit, at settlement. In the event that buyer does not settle on the property the seller will be paid the deposit amount by the financial institution.
Direct debit: Regular electronic debiting of funds from a nominated cheque or savings account.
Disbursements: Miscellaneous fees and charges incurred during the conveyancing process, including search fees and charges paid to government authorities.
Discharge fees: An administration fee to cover the costs incurred in terminating a loan account.
Discharge of Mortgage: A document signed by the lender and given to the borrower when a mortgage loan has been repaid in full.
Disposable income: A person’s remaining income after all known expenses, such as loan payments and bills, have been met.
Draw down: To access available loan funds. Draw down usually refers to a construction loan, or a line of credit. That is a loan where the limit is set, but the amount is not accessed all at once. The borrower draws down or uses the funds as required, up to the set limit.
E.
Easement: A right to use a part of land owned by another person or organisation, for example to access another property.
Encumbrance: An outstanding liability or charge on a property.
Equity: The amount of a property actually “owned” by the owner. It’s the current value of a property less the amount still owed on its mortgage. Equity usually increases as the principal of the mortgage is paid off. Market values and improvements to the property can also affect equity.
Establishment fees: Fees charged by a lender to cover the cost of setting up a loan.
Exit or early repayment fees: Penalties charged by some lenders when a loan is paid off before the end of its term.
Extra repayments: These are regular additional repayments on a home loan account, above the minimum required repayment, which can reduce the term of the loan and the interest payable.
F.
First Home Owners Grant: A grant from the Federal and State Governments. It was introduced as compensation for the increased cost of housing after implementation of the Goods and Services Tax (GST) on 1 July 2000. It’s only for buyers that have not previously bought property in Australia.
Fittings: Items not intended to be removed from a property when it’s sold, for example fixed carpets, lights, curtains and stoves.
Fixed rate: An interest rate that applies to a loan for a set term. Both the interest rate and loan repayments are fixed for the agreed term, regardless of any interest rate variations in the home loan market. The agreed term is usually anywhere between 1 and 7 years.
Freehold: Complete ownership of a property and the land that it’s built on.
G.
Gazumping: When a seller accepts an offer from a buyer but then proceeds to formalise the sale of the property to another buyer with more favourable terms.
Guarantee: A contract to pay someone else’s debt if they don’t pay it.
Guarantor: A person or organisation that agrees to be responsible for the payment of a loan – if the actual borrower defaults or is unable to pay.
H.
Home equity: The amount of a property actually “owned” by the owner. It’s the current value of a property less the amount still owed on its mortgage. Equity usually increases as the principal of the mortgage is paid off and when property market values increase.
Home loan: The funds borrowed to purchase a property. The property acts as security for repayment of the loan. The lender holds the title or deed to the property. It’s also known as a mortgage.
I.
Instalment: The regular payment that a borrower agrees to make to a lender.
Interest: The amount charged for the money borrowed from a lender.
Interest only loan: A loan where only the interest is paid for an agreed term, usually 1 to 5 years. The principal is then repaid over the remaining term of the loan by the conversion of repayments to principal and interest.
Interest rate: The percentage of the loan amount, used to calculate the interest to be paid for a loan.
Introductory loan: A loan offered to new borrowers at a reduced rate for an introductory period – usually 6 to 12 months. It’s also called a discounted or honeymoon rate.
Investment property: A property purchased for the sole purpose of earning a return, either in the form of rent or capital gain. The owner does not live in the property.
J.
Joint tenants: Equal holding of a property between two or more people. If one party dies, their share passes to the survivor or survivors.
L.
Lease: An agreement between a property owner and a tenant. It allows the tenant to occupy and use a property for a set period in exchange for a set rent.
Lender’s Mortgage Insurance (LMI): Insurance which covers the lender if a borrower defaults on a loan and the sale of the property doesn’t cover the outstanding debt. It’s usually required for the loans the lender considers more risky. For example, when the amount borrowed is over 80% of the property value. Only the lender is covered by this insurance. It offers no protection to the borrower.
Line of credit loan: A flexible loan arrangement with a specified limit to be used at a customer’s discretion.
Lump sum repayments: Additional ad hoc repayments, made over and above the minimum loan repayment required.
LVR: The ratio of the amount lent to the valuation of the security (usually the house).
The ratio of the amount lent to the valuation of the home being purchased The loan to valuation ratio (LVR) measures the amount of the loan compared to the value of the property being used as security for the loan, expressed as a percentage figure. From a lender’s perspective, the higher the LVR, the higher the risk to the lender.
Calculating the LVR
The LVR is calculated by dividing the loan amount by the value of the property, then multiplying it by 100. The value of the property is determined by the lender’s valuer, and it may be different to the price actually paid for the property. As an example, if your property is valued at $250,000 and you borrow $200,000, the LVR would be 80% (200000 / 250000 x 100 = 80).
M.
Maturity: The date when a debt must be paid in full.
Maximum loan amount: The maximum amount that can be borrowed. It’s based on a borrower’s disposable income, deposit, and the purchase price of the property.
Minimum loan amount: The minimum amount that can be borrowed.
Minimum repayment required: The amount a borrower is contractually obliged to pay each month, in order to repay a loan within an agreed term.
Mortgage: The funds borrowed to purchase a property. The property acts as security for repayment of the loan. The lender holds the title or deed to the property. It’s also known as a home loan.
Mortgage Broker: A person or organisation offering to organise or sell specific loans on behalf of a group of lenders.
Mortgage Manager: Different from a Mortgage Broker. Mortgage Managers secure funds from wholesale lenders and have the ability to negotiate and package a deal suited to the customer.
Mortgage offset account: A savings account linked to a home loan. The interest earned by the money in the savings account offsets – or reduces – the interest due on the home loan. A 100% offset is where the interest rates earned and paid are the same. A partial offset account is where the interest earned on the offset account is only a portion of the rate paid on the home loan.
Mortgage Protection Insurance: This insurance covers loan repayments should a borrower become sick, injured or redundant and unable to work. It is also called income protection insurance. This insurance covers the borrower not the lender.
Mortgage registration fee: A State Government charge for the registration of a loan. Because the property acts as security for a home loan, the government requires a home loan to be registered so that all claims on a property can be checked by any future buyers of that property.
Mortgagee: The lender of home loan funds.
Mortgagor: The owner or owners of the property offered as security for a loan.
P.
Passed in: A property is ‘passed in’ at auction if the highest bid fails to meet the reserve price set by the seller.
Portability: Allows a different property to be substituted as security for an existing loan. Useful if you are buying a new home but don’t want to set up a new mortgage.
Principal: The amount owing on a loan, on which interest must be paid.
Principal & Interest loan: A loan in which both the principal and interest are repaid, during the agreed term of the loan.
R.
Re-amortise: To recalculate the minimum repayment required to repay the outstanding balance of a loan over the remaining period. This generally happens when:
- The loan term is extended or
- The loan amount has significantly increased or decreased compared to the original loan amount.
Redraw facility: A component of a variable rate loan which enables a borrower to make extra repayments on the loan but later redraw this money if needed.
Refinance: To switch mortgage providers and arrange a new loan for the same property.
Reserve price: At an auction, this is the minimum price acceptable to the seller of a property.
S.
Searches: Research carried out, prior to the settlement of the property, to confirm information about the property. Searches are usually arranged by a solicitor.
Security: An asset that a borrower gives a lender the rights to – so the lender can be confident of getting the money back, one way or another if the debt is not re-payed as per the loan agreement.
Settlement: There are generally two types of settlement that happen with most property purchases:
- Settlement of the property is when the balance of the purchase price is paid to the seller. The buyer receives the keys and becomes the legal owner of the property.
- Settlement of a loan coincides with settlement of the property. It’s when the lender transfers the borrowed funds to the seller or the seller’s mortgage holder.
Split loan: Generally a loan that is part variable and part fixed, but it can also be a loan with multiple variable parts. Borrowers wanting to use equity in a property to invest in the share market may make “multiple variable splits” to better track the return on their investment.
Stamp duty: A State Government tax based on the purchase price of the property. It’s also payable on mortgages in some states. Each state and territory has different rules and calculations. To estimate the amount of stamp duty you may have to pay, use our stamp duty calculator.
Strata title: The most common title associated with townhouses and home units. It acts as evidence of a unit’s ownership. In a strata plan, individuals each own a small portion of a strata building such as a unit – which is identified as ‘lot’ on the title. All owners in a strata plan share common property such as external walls, windows, roof, driveways, foyers, fences, lawns and gardens.
T.
Tenants in common: A form of agreement often used when friends or family purchase a property together. It details the equal or unequal holding of property by two or more people. If one person dies, their share passes according to their Will or the law, rather than to the owner of the other share.
Term: The duration of a loan, or a specific period within that loan. This is usually written in months for example, 360 months equals 30 years.
Title deed: Document disclosing the legal description and ownership of a property.
Title fees: Charged by a state or territory’s Titles Office for title searches, property ownership transfers, the registration of new mortgages and the discharge of old ones.
Transfer: A document registered with the Titles Office that confirms the change of ownership or a property.
U.
Uniform Consumer Credit Code (UCCC): This is the legal framework that governs the relationship between borrowers and lenders. It requires all credit providers such as banks, building societies, credit unions, finance companies and businesses, to:
- Explain the borrowers rights and obligations
- Disclose all relevant information about a loan in a written contract – including interest rates, fees, and commissions.
V.
Valuation: A professional opinion of a property’s value.
Variable rate: A rate that goes up or down depending on money market interest rates.
Variation: A change to any part of a loan contract.
Z.
Zoning: Statutory descriptions of the allowable uses of land as set out by local councils or planning authorities.