This Mortgage Glossary simplifies the most commonly used home loan and finance terms making it easier for you when buying your home or investment property.

 

AAPR: The Average Annual Percentage Rate, also known as the “True Rate”, is used as a tool to assess the average interest payable on a mortgage over a seven-year period. This assessment also includes upfront fees, ongoing fees, and the interest payable on that mortgage over the seven years.
Acceptance: Agree to the terms of an offer or contract.
Additional or Accelerated

Payments:

 This facility allows you to make greater payments than specified on a loan.
Account fee: Many banks/lenders charge one off and, in some cases, ongoing account keeping fees for mortgages.
Amortisation period: This is the term or length of time of the loan as agreed upon.
Application fees: Not all banks/lenders charge an application fee so it is worth checking if the lender you choose is one that charges a fee. In some cases, lenders who do not charge a fee offer a higher interest rate. Your mortgage consultant will explain all this to you.
Appraisal: Is a written report of the estimated value of a property. A qualified appraiser, usually employed by the bank/lender, conducts the valuation.
Appreciation: Is an increase in the value of a property as a result of inflation and market conditions.
Arrears: An outstanding or overdue amount.
Assets: An asset is anything you own that is worth money, including any savings, stocks or funds.
Assignment: Legal transference of a right or a title to a property, to another party.
Auction: A public sale where a property is sold to the highest bidder.
Banker’s Lien: The right of a Bank to retain a customer’s securities until a liability to the Bank is discharged. (See also ‘General Lien’).
Bankruptcy: The legal financial state and individual is in, when unable to meet debts (for Companies it’s known as being ‘wound up’). A debtor may be declared bankrupt by the Federal Court at either the debtors or the creditors instigation, and the debtors estate will be placed in the hands of an official receiver who will distribute the estate in accordance to the provisions of the Bankruptcy Act.
Basic or ‘no frills’ loans: Generally, tend to be cheaper than variable loans, however these loans tend to be less flexible and offer fewer features, such as redraw facilities or no extra payments can be made.
Beneficiary: The beneficiary is the person that is selected to receive the income from a trust, estate, or a deed of trust.
Break Costs: If you have a fixed rate loan contract and you wish to break the contract before the period expires, you may incur a break fee.
Bridging finance: This type of finance is used for times when finance is needed to buy a new house while waiting for the old one to sell and usually has higher interest rates.
Building inspection: It is encouraged to carry out a building inspection prior to purchasing a house to make sure the house is structurally sound.
Building regulations: Legal or statutory rules set up by a local council to control the manner and quality of buildings in its jurisdiction. The rules are generally designed to ensure public health and safety as well as acceptable standards of construction.
Buyer’s Agent: Person to act on behalf of the buyer to find and negotiate on properties the buyer wishes to buy.
Capital The current value of your assets, including car, property, business, or money etc.
Capital gain: Is a term that refers to the financial gain obtained when you sell something for more than you paid for it. Usually, the profit you receive from selling the asset incurs capital gains tax, except on the sale of a home that remains exempt from this tax.
Capital gain tax: A federal tax on the monetary gain made on the sale of an asset (excluding your own residence) bought and sold after September 1985.
Capital growth: The difference between the price you pay for an asset and the price you receive when you sell it or the valuation placed on that asset.
Caveat: Is Latin for beware and is a warning on a property’s title that stipulates that a third party has some rights or interest in the property.
Caveat emptor: ‘Let the buyer beware’ – the principle that puts the onus on buyers to be satisfied with any item before buying.
Certificate of Title: A statement that identifies who owns the land and includes details of mortgages, easements, dimensions of the land and whether there are any obstructions on it.
Charge (over property): The term used to describe any right established over a borrower’s property to secure a debt or performance of an obligation.
Chattels: Refers to personal property. There are two types of chattels; real chattels which are buildings and fixtures, personal chattels which are clothing and furniture.
Collateral security: Additional or supporting security given in addition to the principal security.
Comparison rate As of July 2003 all lenders and brokers must provide a ‘comparison rate’, by law. A Comparison Rate reveals the cost of a loan, allowing you to compare ‘apples with apples’ when choosing a loan. The Comparison Rate takes into consideration the costs associated with setting up a loan including the interest rate, the loan approval fee and any other up-front or ongoing fees. It excludes government fees and charges, because they are standard across all loans.
Construction loan: If you are building a property, a construction loan allows you to draw money as required to assist with building costs.
Consumer Credit Code: is an Act of Parliament that governs the involvement between borrowers and lenders. Credit providers such as banks, building societies etc., must tell you what your rights and obligations are in any credit arrangement. They are required by law to truthfully disclose all relevant information about your arrangement in a written contract, including interest rates, fees, commissions and other information which in the past was often hidden.
Contract of Sale: This is a written statement that is legally binding and outlines the terms and conditions of the sale of property between purchaser and seller.
Conveyancing: is the legal process for transferring a real estate ownership from one owner to another. This can be a costly process and is applicable to all States with the exception of South Australia where Torrens Title is used instead.
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.
Debtor: Someone who owes money to someone else.
Deed: A legal document stating an agreement or obligation regarding a property.
Default: When you fail to meet the mortgage repayment on time.
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 bonds: Banks and lenders provide deposit bonds as a guarantor that the full payment will be made by the due date. Deposit bonds are used when cash is not readily available for the deposit.
Depreciation: A decline in the value of a property or an asset.
Direct debit: A system where funds are electronically debited from your nominated bank/building society account.
Disbursements: Miscellaneous fees and charges incurred during the conveyancing process, including search fees and charges paid to government authorities.
Discharge fees: This is a fee that is charged when closing 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: Any income that is left over after all expenses and bills have been paid.
Draw down: This provides access to available loan funds and usually refers to lines of credit.

Easement:		 A right to use a part of land that is owned by someone else.
Encumbrance: An outstanding charge on a property.
Equity: Is the percentage, or the amount, of your home that you actually own. Equity increases as the mortgage decreases and equity is affected by market values and also home improvements.
Establishment fees: This is a fee that is paid to the bank/lender at the point of setting up the loan. Also known as Application Fee.
Exchange of Contract: This occurs when the vendor and buyer give each other the necessary legal documents (usually occurs via solicitor or conveyancer) and commence the settlement process.
Fee simple: The estate in fee simple is the highest estate in the land, and it is the closest the law comes to recognising absolute ownership for all practical purposes. However, while we refer to a proprietor of an estate in fee simple (who is the owner for all practical purposes), their ownership is not legally absolute, for absolute legal ownership of all and rest with the Crown.
First Home Owners Grant: The Federal Government introduced the First Home Owners Grant (FHOG) on 1 July 2000. Although it was initially established to assist counterbalance the increased cost of building a home due to the GST, it also applies to buying an established home. The amount of the grant is a non-means tested flat rate of $7,000.
Fittings: These are items that can be removed without causing damage to a property.
Fixed rate: This applies to mortgages where the interest rate is fixed and is not affected by inflation, or deflation, and is for an agreed period of time. Most fixed rate loans can be taken out over a 1, 2, 3, 4, 5, 7, or 10-year period and the interest rate offered to you at the time of applying for the loan will remain ‘fixed’.
Fixtures: These are items that are likely to cause damage to a property if removed. It pays to check what the sale contract specifies.
Freehold: Complete ownership of a property and the land that it’s built on.
Garnishee order: A court order taken out by a creditor on a person’s employer or banker for the deduction of funds from his wages or bank account to repay a debt.
Gazumping: Many buyers have been extremely frustrated with a practice known as gazumping. This is when the seller verbally agrees on a price for a property but then later advises you that someone else wants to buy the home and has offered more money. In some occasions you are given the chance to match or better the increased offer. In most cases, the home is sold for the increased price without you even knowing about it.
General lien: Sets out in writing the Bank’s right to retain property until a debt is paid. Includes Power of Attorney and other clauses generally contained in Bank security forms.
Gross income / profit: Income from a person or company, before tax, superannuation or payroll deductions.
Guarantee: A contract to pay someone else’s debt if they don’t pay it.
Guarantor: This is when someone agrees to be responsible for the payment of another person’s debts should they default on their repayments.
Holding deposit: A refundable deposit based on the goodwill of the buyer to go ahead with the purchase.
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.
Honeymoon Rate: Also known as ‘Introductory Rate’, this is when lenders offer a very cheap interest rate, usually for a one-year period.
Indemnity: Security against damage or loss; sum paid in compensation for loss incurred.
Interest: This is what lenders charge you for the use of their money.
Interest only loan: This type of loan is short term, one to five years, where only the interest is paid during the agreed term.
Interest Rate: The rate at which interest is applied.
Introductory Loan: See our glossary item ‘Honeymoon Rate’.
Investment property: The owner does not live in an investment property and the property is purchased simply for earning a return on the investment, which can be in the form of capital gain or rent.
Joint and several liability: The Bank’s joint account authorities, guarantee forms, etc are framed to ensure that joint account holders with debts due to the Bank of joint guarantors liable to the Bank shall be SEVERALLY liable, (i.e. individually), as well as JOINTLY. With Joint and several liability, a creditor has as many rights of action as there are debtors; he can sue them jointly or severally until he has obtained payment, and an unsatisfied judgment against one debtor will not be a bar to an action against the others.
Joint Tenants: This is when there are two or more purchasers to the one property and each purchaser owns an equal share in the property. Upon the death of one owner, their share automatically is transferred to the remaining owners.
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: As the name suggests, a lender is a bank, building society, credit union or a specialised home lender that lends money.
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 riskier. 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.
Liability: A debt which one is liable for; being responsible only to a limited amount.
Line of credit: Line of Credit also known as an equity home loan, is when the lender assigns you a credit limit secured against your property, and when you need cash you draw against that limit, usually by writing a cheque or using a special debit card. As you pay back the loan (the terms of repayment vary), the money becomes available to you to use again.
Loan to Value Ratio: This is a tool used to measure the strength of a loan. The formula used to calculate the loan to value ratio (LVR) is as follows,

Mortgage

Property Price X 100 = LVR

For example, if a house is worth $320,000 and the mortgage for the property is $220,000, then the LVR equals 68.75%
Maturity: This is the date by which the loan must be paid in full.
Maximum loan amount: After assessing your disposable income, deposit and the purchase price of a property, you will be advised of the maximum amount you can borrow.
Minimum repayment: This is the least amount you are required to pay each month on your loan.
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 insurance: If you are borrowing more than 80% of the property value, the bank/lender will most likely request that mortgage insurance is taken out. It is important to note that this form of insurance protects the lender and not you, the borrower.
Mortgage offset account: This is a savings account that runs in conjunction with a home loan where the interest earned on that account is applied to the interest that is paid on the loan. By doing this, you are depositing extra money on to the mortgage, which you can access when needed, and reduce the interest that is charged on your mortgage
Mortgage protection insurance: Also know an income protection insurance, this insurance is often recommended as it covers you if you are unable to meet repayments due to serious illness or redundancy
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.
Negative gearing: Gearing your investment so that the cost to maintain it (loan repayments, council rates, maintenance etc.) outweigh the income produced by the investment, leading to a reduction in taxable income.
 
Off the plan purchase: Buying a property from the plans only, not the finished product.
Over capitalising: This occurs when you spend more money on your home than you are likely to get back if you sell the property.
Owners Corporation: All the unit owners within a strata building. The owners elect a council responsible for the management of the building and its common areas.
Passed in: A property is ‘passed in’ at auction if the highest bid fails to meet the reserve price set by the seller.
Portability: This option allows you to keep your existing home loan if you move house, without having to refinance.
Power of Attorney: A written authorisation to another person, or persons, to perform certain acts for the signer, as if they were the signer.
Prepayment: A payment made before the due date of the loan or in addition to the minimum repayment. This can sometimes incur a penalty fee so be sure to check the terms and conditions of the loan.
Principal: This is the capital sum borrowed.
Principal & interest loan: This is a loan where both the interest and the principal is to be repaid.
Re amortise: This is when you recalculate the minimum repayments and is usually done if the loan amount has changed significantly.
Redraw facility: This feature allows you to make extra payments on your mortgage and then borrow from that money if needed. Redrawing may extend the life of the loan and increase your repayments.
Refinance: Occurs when you replace or extend an existing mortgage by arranging for a new mortgage, with the same or different lender.
Reserve Bank: Is the body that is responsible for the maintenance Australia’s financial system, and for setting the official short-term interest rates on which many variable-rate home loans are based.
Reserve price: This is the minimum price a seller is willing to accept at an auction.
Searches: Research that is undertaken by solicitors to confirm information about the property or the purchaser, prior to settlement.
Securitisation: Is the packaging of cash flow producing assets into a marketable security, e.g. property, roads, bridges, etc. The process where mortgage backed securities (in the form of bonds) are sold directly into the capital markets. Investors in the bonds comprise of Superannuation funds as well as other major institutions.
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.
Serviceability: A borrower’s ability to make repayments (service) on the loan when payments are due.
Settlement: There are generally two types of settlement that happen with most property purchases:

  1. 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.
  2. 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: This is exactly as it sounds. It is a combination of the several of loans on offer and may have a portion variable, fixed or a line of credit.
Stamp Duty: This State Government tax is paid by the purchaser and is calculated as a percentage of the purchase price.
Strata title: Strata title has enabled the subdivision of land and buildings into lots and common property. The “lots” are the units or other areas owned by owners. Apart from the unit there can be areas like laundries, car spaces, garages, marinas which form part of the lot. The common property is everything that does not form part of a lot and is owned by the owner’s corporation (all the owners collectively).
Tenants in common: two or more purchasers owning the one property in any share proportion they choose. When a tenant in common dies, their share in the property passes in accordance with their will. Unlike joint tenants where the share passes to the other owners or joint tenants.
Term: Also known as the life of the loan and refers to the length of time for which the loan is to be repaid.
Third party security: Security provided for a mortgage by a third party (someone different from actual borrowers) who is legally different from the borrower or debtor.
Title deed: This legal document advises of ownership of a property.
Title search:
Process to ensure that the vendor has the right to sell and transfer ownership.
Torrens Title: Torrens Title is the most common form of property title in Australia. All previous and current owners are listed on the one deed, as are all previous mortgages etc. Also known as “RPA” standing for “Real Property Act”, the legislation that governs the operation of Torrens Title
Transfer: This document confirms a properties change of ownership with the Land Titles Office.
Unencumbered: This is a property that has no outstanding charges, liabilities or restrictions on it.
Valuation: A report undertaken by a registered valuer that stipulates the value of a property. Often there is a fee that the bank/lender may charge for this service.
Variable rate: This is a rate that increases or decreases depending on money market interest rates.
Variation: This term refers to any changes made in a loan contract.
Vendor: The party that is selling the property.
Yield: Income that is earned from a property that is typically expressed as a percentage of the value of the investment.
Zoning: This is a statutory explanation that provides an account of the uses of a property as determined by local council and planning authorities.