Lenders Jargon

AAPR: Also known as a Comparison rate, the Average Annualised Percentage Rate reflects the total cost of your loan by taking into account other costs other than the advertised interest rate such as ongoing fees etc. This is then expressed as a total interest rate cost to you over an average loan term.

Amortisation: To pay off principal and interest of a loan over a period of time.

Assets: Items of value which you own. E.g. Property, Cash, Furniture & Fittings etc.

Balance Sheet: A financial statement confirming assets, liabilities and capital.

Break costs: A cost incurred for paying out a loan balance on a fixed term loan before the term has expired.

Bridging finance: A short term loan to ‘bridge’ the financing for a purchase which is relying on funds from a sale which is yet to occur.

Capped loan: A loan where the interest rate is set so that it may reduce, but not exceed a certain level over an agreed period of time.

Capital: The current value of your assets. E.g. Property, Cash, vehicles etc.

Comparison Rate: See, AAPR.

Consumer Credit Code: The Consumer Credit Code also known as the UCCC is parliamentary legislation which is designed to protect the rights of the consumer by ensuring all lenders adhere to the same rules of lending practice.

COSL: The Credit Ombudsman Service Limited.

Credit Reference or Credit Report: In order to approve a loan, a lender will require a credit report on the borrower to confirm previous loans applied for or credit difficulties recorded. Credit reports are prepared by authorised credit reporting agencies, such as the VEDA. The Lender obtains the borrower’s permission in writing to proceed with a credit report.
*** You can obtain your own personal credit report at www.mycreditfile.com.au

CRS: The Comparison Rate schedule which must be made available by each lender to confirm the annual percentage rate and its corresponding Comparisons Rate for loan products offered.

Deferred Establishment fee: A penalty which may be charged when a loan is repaid by the borrower in full, before a pre determined period of time.

Early Repayment Penalty: If a loan is repaid before the end of its term, lenders may charge an early repayment penalty.

Equity: The value which an owner has in assets over and above the debt against it. E.g. the difference between the value of a property and the amount still owed on the mortgage.

Guarantee: A guarantee is where a person agrees to meet the legal obligations of another person should that other person default on a loan or an agreement. If a property is being purchased in the name of a company or trust, often the lender will require a personal guarantee of a director of the company, in some instances also the beneficiaries. This means that should the company then default on a loan, the lender will be able to make the director who provided the personal guarantee meet the required obligations.
*** Guarantees are a serious legal obligation which is binding, if you are asked to provide a guarantee seek legal advice. If a guarantee is to be provided for mortgage purposes the lender will request that you seek independent legal advice.

Guarantor: The person who provides the guarantee.

Home loans: There is a huge range of mortgage finance products available on the market at any given time. Generally they fall within one of the two following categories:

• • Variable home loans – A variable home loan means the interest rate varies throughout the term of the loan and is subject to change according to the economic climate and the official rate set by the reserve bank.
  • Fixed home loans – A fixed home loan means that the interest rate will stay the same throughout the term of the loan. This means that any adjustments made by the reserve bank are irrelevant, and won’t affect your loan.

There are also variations of these two loan types. These include split, capped rate, honeymoon, home equity and bridging loans.

• • Split loans – Split loans allow you to combine the best of both worlds, and have part of your loan amount at a fixed rate and part at a variable.
  • Capped rate loans – These are loans with rates that cannot exceed a set percentage for a fixed period of time, but may decrease in that time.
  • Honeymoon loans – This type of loan sees lower rates for the first 6 to 12 months then reverts to a standard rate and the repayments increase.

Interest-Only Loan: Under an interest-only loan, usually the borrower makes no principal repayments. The repayments are for the amount of interest only, which has accrued on the loan. These loans are usually for a short period of around 1 to 5 years.

Line of Credit Loan: This is a flexible evergreen loan that allows you to use and payback as many times as you wish for the life of the loan term.

LMI: See Mortgage insurance below

LVR: Loan to value: This is the term used to describe the % ratio between a loan that a lender is willing to loan against a property as compared to the property value. 
*** Don’t assume that just because you have purchased the property for a certain price that it is worth that amount the lender will seek an independent valuation on the property to determine if the sale price is in line with the current market value. Most lenders will give up to 90% of the value that they determine the property is worth. This is important because the value that a lender will apply to a property will be based on the lender’s calculation of the value and not necessarily what the vendor says it is worth.

Mortgage: A mortgage is what happens when someone borrows money from someone else (usually a bank) to assist in the purchase of a property. The person who borrows the money (the ‘mortgagor’) signs over (or ‘mortgages’) their legal rights in relation to the property to the person they borrowed the money from (the ‘mortgagee’).
*** The mortgagee is able to take over the legal ownership of the property if the person who borrowed the money is not able to meet their obligations under the terms of the loan. This can include selling the property to recover the debt.

Mortgage stress: Someone who is unable to meet their mortgage repayments and who is under pressure from their bank or mortgage lender to bring their payments up to date is said to be experiencing ‘mortgage stress’.
*** The best way to deal with mortgage stress is to seek professional advice and contact your lender to discuss options. Acting quickly can mean the difference between saving thousands of dollars or being left with little or nothing if the mortgagee is forced to take possession of the property and sell to recover debts.

Mortgagee: The lender of money for a mortgage. To provide security for the loan the purchaser of the property ‘mortgages’ their legal rights in the property back to the lender as security for repayment of the money borrowed.

MIP: Mortgagee in possession. MIP occurs when an owner of a property is not able to meet their obligations under their mortgage loan so the lender (or mortgagee) takes possession of the property to recover the money owed. MIP is what happens if mortgage stress can’t be resolved.

Mortgage insurance: Mortgage insurance is often a requirement of a mortgage loan from a bank. It covers any shortfall between the value of the property and the debt owing in the event that the person who borrowed the money is unable to make their loan repayments.
*** Mortgage insurance is payable by the borrower and not the lender and is payable when the LVR is higher than 80%, however in Lo Doc cases when the LVR is over`60%. It is important to understand that mortgage insurance is not insurance against not being able to make your loan payments – mortgage insurance is taken out by the bank to cover the bank.

Mortgagor: The person who signs over their legal rights in a property to secure money. Only a person with a legal ownership interest in a property is able to be a mortgagor.

Non-bank lender: a lender who sources the money they loan on mortgage security from other sources such as the global capital markets or from wholesale banking facilities not otherwise available to the general public.
***Sometimes the best mortgage product for a certain type of borrower will be available from non-bank lenders.

P&I: Principle & interest. The type of loan where both the principle amount of the loan and the interest are repaid over the life of the loan.
***The benefits of this type of loan are that the outstanding balance of the loan reduces over time as the repayments are made.

Regulated Loans: Loans which are considered for personal use and is governed by regulations of the Consumer Credit Code.

Secured: To take guarantee over property for purposes of protecting a loan.

Security: An asset used to guarantee a loan.

Serviceability: Ability of borrower to make and meet repayments on a loan based on the borrowers expenses and income(s).

Standard Variable Rate: An interest rate, which is applied to a loan. These may have features such as redraw facility, construction, split loans options and mortgage offset.

Variable Interest Rate: This is a fluctuating rate of interest charged by lenders. Variable interest rates change as official market interest rates rise and fall.