Common Finance Terms

Common finance terms

ADDITIONAL REPAYMENT: Any extra repayment made, over and above the payment as set out in the loan agreement.

ADJUSTMENTS: This is the process undertaken by the Conveyancer to allocate funds on settlement day, that the seller may have paid for and has not used by settlement day, or for which the buyer would from now on be billed for.  Including items like Council rates and water rates etc.

APPLICATION FEE: The fee charged by a Lender when an application is lodged. (Often only payable if formal approval is secured and, in some cases, may be waived.)

APPRAISAL: An appraisal is an assessment of the potential sale value of a home, usually carried out by a Real Estate Agent and not to be confused with a valuation.

APPROVAL IN PRINCIPLE: An indication from a Lender that you meet their requirements for a loan.  It is important to remember that this is indicative only and can often mean that they have checked only your borrowing capacity and deposit but have not yet assessed your application in full.  These are of little use.

APPROVED SUBJECT TO/CONDITIONAL UPON: This applies to a loan that has been fully assessed and approved by the Lender but is subject to confirming some extra information or additional documentation.  Often used whilst awaiting the results of a valuation to confirm that the security values up and is satisfactory to the Lender.

ARREARS: Overdue amount of money, due and not yet paid.

BRIDGING FINANCE:  A short-term loan to cover the gap between purchasing a new property and afterward, selling the old property.

CAVEAT: An instrument lodged on the title of a property which acts as a warning to other parties, including prospective purchasers or lenders, that a third party has an interest in the equity of the property.

COMPARISON RATE: A tool to enable consumers to identify the true costs of a loan including the interest rate plus any underlying charges. It is important to remember that advertised comparison rates will apply to a specific loan amount and the result will change with a higher or lower loan amount.

CONTRACT OF SALE (COS): A formal and legally binding agreement which sets out the terms and conditions for the sale of a property. A contract becomes effective once it has been fully signed and dated.

CREDIT SCORE/RATING:  Lenders use your credit score, or rating as part of the decision as to whether to provide you with credit.  Your credit score is based on personal and financial information about you that is kept in your credit report.  For free E-Book, click here –

DEFAULT:  Failure to pay a debt on it’s due date.  Defaults may be listed on a credit report.

DEPRECIATION: Decrease in value over a period.  Often used in association with taxation.

EQUITY: The value of an asset minus the amount you owe, is your equity in the asset.

ESTABLISHMENT FEE: An upfront fee sometimes charged by a Lender when you borrow from them.  Also known as an application fee.  Not all Lenders charge this fee and many that do, will only charge the fee once formal approval is issued.  The fee would then usually be deducted at settlement.

FIXED INTEREST RATE: A fixed interest rate means that the Lender cannot raise and will not lower the rate, from the agreed interest rate during that fixed term.  Usually, between one and five years.

FORMAL APPROVAL:  A formal approval for a loan means that all conditions of the approval have been met.  This is the same as unconditional approval.

GROSS INCOME: Your gross income is the amount you receive before tax is taken but does not include superannuation guarantee.

GUARANTEE: In finance terms, usually refers to a guarantee by a family member of the borrower, agreeing to set aside up to 20% of the purchase price in cash or mortgage to guarantee the Purchaser’s deposit.

HOLDING DEPOSIT: Deposit paid to have a vendor take a property off the market, a demonstration of good will, that the purchaser intends to move forward with a purchase.  Refundable if there is a satisfactory finance clause providing a reasonable exit from the contract.

HONEYMOON RATE: Honeymoon interest rate is also known as an introductory rate and will usually mean a discount off the going rate for a period of between one and three years.

INTEREST ONLY LOAN: An agreement that the borrower enters in to with a Lender to only pay the accruing interest on a loan and nothing off the principle.   Common with investment properties and usually for fixed periods.  Useful tool in the medium term, to aid cashflow and the ability to build a property portfolio.

JOINT TENANTS: Equal holding of property between two or more persons. Decided at purchase time. If one party dies, their share automatically passes to survivors in equal portions, regardless of a will.

LENDERS MORTGAGE INSURANCE LMI:  This is an insurance that covers the Lender against any loss or shortfall if a property is sold with funds still outstanding, often a mortgagee sale. (Mortgagee in possession). LMI premiums are paid by the borrower but are there to protect the Lender and are usually payable where the Loan to value ratio is above 80%, sometimes above 60% loan to value ratio for Low-Doc loans. Lenders Mortgage Insurance can usually be added to your Home Loan, but conditions apply. Mortgage Insurers will pursue reimbursement from the borrower in the case that they have to pay out the shortfall.

LOAN TO VALUE RATIO (LVR):  The Loan-to-Value Ratio (LVR) is the amount you are borrowing, represented as a percentage of the value of the property you are buying. The bigger your deposit, the lower the LVR will be.

LOW DOC: Abbreviation for Low documentation loan.  The Lender will require less paperwork and verification of income.  These loans attract a higher interest rate as they are deemed higher risk.

MORTGAGE: A legal instrument lodged against the title of a property, which secures a loan.  Most often used over Real Estate.

MORTGAGEE: The registered Mortgage Provider (Lender)

MORTGAGE PROTECTION INSURANCE: Not to be confused with Lenders Mortgage Insurance.  This insurance is to protect the borrower and cover loan repayments if they are not able to meet their payments and caused by an insured event or situation.

NEGATIVE GEARING: This means that the income from a property does not cover all outgoing expenses including interest, rates, maintenance, and repairs.

OFF THE PLAN:  Purchase of a property prior to completion.

OFFSET ACCOUNT: A savings account with your Home Loan Lender where the balance in savings offsets all or part of the interest payable on your home loan in lieu of receiving interest on the savings.

PORTABILITY: A loan feature that allows you to transfer your home loan from one house to another without the need to seek finance again. Conditions apply.

REDRAW: Excess funds repaid to your home loan over and above those required that the Lender agrees you may withdraw later.

REPAYMENT HOLIDAY: Usually means that you have a buffer of extra funds available in your redraw facility and you Lender will allow you to stop or reduce your scheduled home loan repayments.
Always contact your Lender beforehand to ensure this will be enough to cover the amount of the scheduled payments. This will attract the interest back in full or part, from your early repayments.

SECURITY: The collateral for a loan, usually the property being purchased, or in the case of a guarantee loan, may also be a second mortgage over the Guarantor’s property.

STAMP DUTY – SEE TRANSFER DUTY:  State Government tax based on the value or the purchase price of the property.

TENANTS IN COMMON: Two or more people who co-own a property in defined shares may dispose of a property as they wish. Shares may be equal or unequal. Shares may be sold or bequeathed in a will etc. There is no right by survivorship.

TITLE: This is a document that lists who the legal owner of a piece of property.

TORRENS TITLE: A Torrens title means that the person owns the building and the land. This is the standard title type for freestanding dwellings in Australia.

TRANSFER DUTY:  Previously known as stamp duty in Qld.  This is a State Tax calculated on the purchase price/value of the property.

UNENCUMBERED: Free of debt or other financial liability.

VENDOR: Specifically, regarding the Finance Industry, usually refers to the seller of property.

VALUATON: An estimation of the worth of a property, carried out by a Professional Valuer.

VARIABLE INTEREST RATE: A rate that may vary up or down over time, depending on market forces.