Average Annualised Percentage Rate, also referred to as a Comparison rate. The AAPR reflects the total cost of your loan by taking into account other costs other than the advertised interest rate. This is then expressed as a total interest rate cost to you over an average loan term. It is a more accurate reflection on the true cost of a loan.
Concept used by funders to determine the amount of Equity which can be used as security in the establishment of a line of credit or purchase. This is not the same as equity but rather takes into account the borrowers serviceability capacity and is therefore a much lower amount.
Cooling Off Period
The time available to the purchaser to conduct building & pest inspections, commence loan application & bank valuations before they need to Exchange and are committed to settlement of the property. Also referred to as Finance Due Date.
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 authorized credit reporting agencies, such as the Credit Reference Association of Australia. Borrowers can obtain a free copy of their report from Baycorp Advantage on www.mycreditfile.com.au
Deferred Establishment Fee
A penalty which is charged when a loan is repaid by the borrower in full within a minimum timeframe (usually 3 to 5 years). May also be referred to as Early Repayment Penalty.
Deposit bonds or bank guarantees can be a substitute for the cash deposit required when purchasing a property. Deposit Bonds for up to 10% of the contract price can be issued in two main forms:
1. Short term for less than six months
2. Long term for between six and thirty six months.
They can be used in a number of scenarios; when buying off the plan; when funds are tied up in another source; when there is a lack of “liquid” assets; or when planning to bid at auction. Once issued however, deposit bonds are binding on the borrower.
DSR - Debt Service Ratio
Maximum of the applicants weekly, fortnightly or monthly wage which will support loan repayments over the agreed loan term. Usually expressed as a percentage - most lenders set a maximum DSR between 30% to 33%.
Early Repayment Penalty
If a loan is repaid before the end of its term, lenders may charge an early repayment penalty. May also be referred to as Deferred Establishment Fee.
Where the purchaser and vendor agree to unconditionally proceed to settlement of the property. There are risks associated with early exchange where the inspection, valuation and loan application has not been completed as not changes are allowed once exchange has occurred. Significant penalties apply for either party in breaking the contact after the exchange period. Also refer to Finance Due Date and Cooling Off Period.
The value which an owner has in an asset over and above the debt against it. Eg the difference between the value of a property and the amount still owed on the mortgage. In determining the equity available when purchasing or refinancing a property, lenders use the concept of Available Equity.
Finance Due Date
The time available to the purchaser to conduct building & pest inspections, commence loan application & bank valuations before needing to exchange and therefore being committed to settlement of the property. Once the due date has been completed, the purchaser would either proceed to Exchange or withdraw from the purchase. Also refer to Cooling Off Period.
First Home Owners Grant
An incentive from the Federal Government giving $7000.00 to first home buyers as a one off payment. More info on each state can be found at http://www.firsthome.gov.au/
Funds to Complete (FTC)
An estimate of the funds required, made up of deposit, legal fees, stamp duty, lender fees and lenders mortgage insurance (if any) upon settlement of a property. FTC allows borrowers to determine the ballpark amount of funds required before committing time and effort in searching for a property.
Home Equity Loan
A home equity account gives you a revolving line of credit secured by the value of your house. This allows you to use the funds for any other purpose such as the purchase of a second property, or shares or other investments. The interest rate is generally higher than a standard variable rate, and these accounts are not suitable for everyone.
Colloquial term applied to Introductory Loans. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term the loan reverts to the standard variable rate.
Insurance – Life
Life cover provides a lump sum benefit if the insured person dies or is diagnosed with a terminal illness. This provides you with the peace of mind knowing that your family will be provided for in the event of your premature death. The monies can be used to pay off debts and or provide an income for your family should the unimaginable happen. Whilst it is possible for Life Insurance to be structured so that premiums are paid from either your super fund or savings account, there are significant feature differences between each structure that must be fully understood before proceeding.
Insurance – Income Protection
This insurance policy pays a monthly benefit of up to 75% of your gross annual income if you are unable to work due to illness or injury. Key aspects to consider when reviewing this type of cover is the waiting period and benefit periods which can differ considerably between insurers. Whilst it is possible for Income Protection to be structured so that premiums are paid from either your super fund or savings account, there are significant feature differences between each structure that must be fully understood before proceeding.
Insurance – Total & Permanent Disability (TPD)
TPD insurance provides a lump sum benefit if you become permanently disabled. A permanent disability means you can no longer work in your current occupation or a job you have trained or studied for or previously worked in. Care should be taken to ensure you the correct occupation definition being either “Own Occupation” or “Any Occupation” to ensure you are fully covered in the event of a disability. Whilst it is possible for TPD to be structured so that premiums are paid from either your super fund or savings account, there are significant feature differences between each structure that must be fully understood before proceeding.
Insurance – Trauma
Trauma insurance provides a lump sum benefit or equivalent installments if you are diagnosed with a specific illness or injury such as cancer, stroke, blindness, severe burns, etc. The benefit amount can be used to reduce debts, pay for medical expenses and or maintain your lifestyle during your recover period.
Under an interest-only loan, 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. Some funders will allow additional repayments during the term of the interest-only period.
Land Construction Loans
Used where borrowers are required to settle on land and then build a home. Upon settlement of the land, the construction loan is drawn down in stages called progress payments which coincide with key construction stages.
Lenders Mortgage Insurer (LMI)
Insurance provider who will insure the lender against loss in the event the borrower defaults on the repayments of the mortgage. The borrower remains liable for the loan default but the loss to the lender is covered by the mortgage insurer. LMI is a one off payment charged by the lender upon settlement and can often be capitalised to the loan amount.
Line of Credit (LOC)
A loan used by predominantly property investors in managing the cash flow associated with multiple investment properties. A LOC has 3 components being limit, balance and available funds and vary between funders in specialised features such as interest capitalisation and Interest Only term.
For example if you wish to purchase a property worth $100,000 the lender may approve a loan for 80% of the property value. It will then be up to you to provide the remaining 20% plus costs (mortgage registration and stamp duty etc).
Lo-Documentation Loan (Lo-Doc)
A loan available to applicants unable to meet the required income levels to service the loan. These loans generally carry an interest rate loading to reflect the higher risk to the lender.
A transaction or savings account that is linked to a term loan. The account can be used savings and or day to day transactions. The account can work in one of 2 ways either a) interest on the offset account balance is credited to the term loan or b) offset account balance is offset against the loan balance in the calculation of interest on the loan. The offset account and term loan are separate accounts which is different to Redraw and Line of Credit which are the one account.
Non Conforming Loans
Loans available to applicants who do not meet the criteria for regular lending. Typical reasons could range from impaired credit history, insufficient income or business start up finance. These loans generally carry an interest rate loading to reflect the higher risk to the lender.
Off the Plan
It is possible for the owner of a block of land or development to start selling individual properties before they have been legally separated. This process is referred to as selling off the plan and used to describe the purchase of property that does not yet exist as separate title. In this case, the purchaser is simply buying a block “off the plan”, rather than waiting until the blocks have been separated and issued with their own Certificate of Title.
A portable loan allows you to sell your house and move to a new one without having to refinance. This saves application and legal fees. Most lenders however insist that the loan amount is the same or less. Make sure you know the terms of your loan.
Portfolio Review Meeting
Financial planning discussion where existing financial position is matched up to a client’s medium to long term financial goals. The discussion involves a review from an accounting & tax, financial planning and mortgage broking perspective and identifies the gap between the current and proposed financial position. The review can cover a broad range of disciplines from property investment, superannuation, share investments, superannuation and retirement.
Lenders will assess each applicant differently on their ability to service the loan. There are significant differences within lenders in this area and it pays to use a home loan broker familiar with serviceablity requirements before an application is submitted.
Is the completion of the sale or purchase of a property. When the final payments are made at settlement, the lender will receive the signed transfer and the mortgage. The lender will hold the title deeds and the mortgage until the loan is repaid.
Typically associated with the end cash position for investment properties. It refers to the difference between the rental income & tax benefit and all outgoings including loan repayments, rates, insurances, management & strata fees and repairs. In some cases it can be a surplus amount which refers to positively gearing however in many cases, it is associated with negatively gearing.
Stamp duty is a state government tax which is payable when a property is sold. Stamp duty is calculated on the purchase price of the property and is paid by the buyer. Each state and territory has a different rate of duty.
Investors are able to apply for a tax variation with the Tax Office to receive any tax refund associated with holding a negatively geared investment property during the course of year (through reduced tax on wages), rather than as a lump sum at the end of the year.
Where the borrower applies for an increase over and above the existing approved loan amount with no changes to the existing loan structure. Depending on the amount of the increase, the lender may not need to order a valuation.
The Uniform Consumer Credit Code Legislation - a Federal Act of Parliament to ensure uniformity amongst all credit providers. E.g. all loan contracts must now adhere to a uniform format as specified by the act. It must set out all fees / charges that the borrower (and, if required, guarantor) are liable for under the loan contract.
An assessment of the value of a property conducted by a licensed valuer. Valuers are typically engaged by the lender before full approval is given. The methodology used by valuer’s focuses on finding 3 comparable sales within the last 6 months. This can prove difficult for the valuer where the security is very different or if minimal sales activity has occurred in the area. Valuations can be completed in the following three ways;
a) Online Valuation - Where the market value is determined by comparable sales over
the last 6 months based on public property sales databases.
b) Drive-by Valuation - This process is in addition to the above but includes a drive past the property to view the overall construction type and condition of the property.
c) Full Valuation - In addition to the above two methods but includes measurement of the internal dimensions and block size.