Making sense of the language of finance

As with any industry, finance has it’s own secret language made up of jargon, abbreviations and terms that can serve to confuse the everyday home buyer enquiring about a loan and leave your head spinning.

In the interests of keeping it simple and transparent, we’ve put together this quick glossary of key finance terms, so the next time you speak to your broker, bank or real estate agent, you’ll know exactly what they’re on about:

Application fee

A fee paid by a borrower for setting up a loan.

Approval in principle or Pre Approval

Initial approval process which provides an estimate of how much someone can borrow (before finding the property), based on the information provided to the bank.

Basis points

One basis point equals 0.01% interest. For example, 25 basis points equals 0.25%.

Bridging finance

A loan/facility that can be used when buying a new home before selling an existing home. Bridging finance is generally temporary/short term.

Comparison rate

A rate which includes both the interest rate and most fees and charges payable during the life of the loan, expressed as a single percentage figure. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included and may influence the cost of the loan.

Cash

Includes all money that is available on demand including bank notes and coins, petty cash, certain cheques, and money in savings or debit accounts.

Capital gain/loss

The difference between the purchase price of an asset and the price at which it is sold.

Conveyancer

A third party hired by the buyer/seller to represent them to facilitate the conveyancing process. Also known as a settlement agent.

Conveyancing

The legal process of transferring ownership of property from the seller to the buyer. Credit rating - a ranking applied to a person or business based on their credit history that represents their ability to repay a debt.

Credit history 

A report detailing an individual's or business' past credit arrangements. A credit history is often sought by a lender when assessing a loan application.

Default

To be unable to meet outstanding obligations, such as the interest payments or capital repayments on a loan.

Debt consolidation

The process of combining several loans or other debts into one for the purposes of obtaining a lower interest rate or reducing fees. Read more about debt consolidation here.

Credit limit (or facility limit)

The maximum loan amount that a borrower can borrow under their home loan contract.

Equity

The amount of an asset that is owned (e.g. the value of the property less any outstanding loans secured by the property).

Facility agreement (or loan agreement)

The formal contract between the borrower and the lender which sets out the terms and conditions of the loan.

Facility limit (or credit limit)

The maximum loan amount that a borrower can borrow under their home loan contract.

Fixed interest rate

Your loan's fixed interest rate will stay the same for the fixed rate period. This means your repayments won’t change during the fixed rate period.

Guarantee

A promise by a third party to meet a borrower’s payment obligations if they are unable to pay.

Guarantor

The third party who is providing the guarantee for the borrower. Read more about guarantors here. 

Honeymoon rate

A low interest rate offered at the start of a loan.At the end of the specified time period the interest rate converts to a standard variable rate.

Interest

The cost of borrowing money on a loan or earned on an interest-bearing account.

Interest rate 

a percentage used to calculate the cost of borrowing money or the amount you will earn. Rates vary from product to product and generally the higher the risk of the loan, the higher the interest rate. Rates may be fixed or variable.

Interest only loan

The borrower only has to pay the interest that is accrued on the loan and no principal payments for a specified time period.

Introductory rate

A low interest rate offered at the start of a loan. At the end of the specified time period the interest rate converts to a standard rate.

Investment loans

Loans used for investment purposes, such as the purchase of an investment property.

Lenders Mortgage Insurance (LMI)

Insurance taken out by the lender to protect itself from default by the borrower. Generally required for home loans with a Loan to Value Ratio (LVR) above 80%.

Line of credit

A fully functional transaction account that has a credit limit attached to it. The borrower can generally withdraw funds at any time, up to the credit (or facility) limit. (If the credit limit is attached to more than one account, the borrower may only be able to draw up to the account limit on each account.) There is usually no fixed repayment schedule; however, the borrower is usually required to make payments to at least cover the interest and fees on the loan.

Loan agreement (or facility agreement)

The formal contract between the borrower and the lender which sets out the terms and conditions of the loan.

Loan to Value Ratio (LVR)

The total amount of the loan divided by the appraised value of the property. For example, if a property is valued at $300,000 and the loan amount is $240,000 then the LVR is 80%.

Lump sum payment

An extra repayment made to a loan, outside of the scheduled repayments.

Monthly service fee

A fee which may be payable each month on a loan account. The fee varies depending on the type of loan.

Mortgage

A document which creates a security interest over a property to a creditor as security for a loan.

Mortgagee

A person who holds a mortgage as security. For example, if a bank holds a mortgage, the bank is the mortgagee.

Mortgagor

A person who gives a mortgage. For example, a borrower who provides a mortgage over their house as security for a loan is a mortgagor.

Offset account

Helps reduce interest costs on a loan by linking the loan to a transaction or deposit account.

Portability

The ability to ‘move’ a loan from one security (e.g. property) to another. For example, borrowers can usually take their current loan with them when buying a new home by swapping the security held on the loan to the new property.

Pre approval (or approval in principle)

Initial approval process which provides an estimate of how much someone can borrow (before finding the property), based on the information provided to the bank.

Prepayment

Additional payment(s) made to a loan, in addition to the scheduled principal and interest repayments.

Principal

The original amount borrowed on a loan or the remainder of the original borrowed amount that is still owing (excluding the interest portion of the amount).

Principal and interest loan

A loan where the repayments are made up of principal and interest.

Redraw

A loan feature that allows the withdrawal of funds paid in advance, if the borrower is far enough ahead of their scheduled repayments.

Refinance

When a new loan is taken out to pay off an existing one. Refinancing is often done to extend the original loan over a longer period of time, reduce fees or interest rates, switch banks, or move from a fixed to variable loan.

Repayments

The amount that the loan contract specifies must be paid at an agreed frequency (e.g. fortnightly or monthly).

Repayment holiday

If a borrower is ahead in their repayments, they can apply for a break in making loan repayments. Security The asset used to secure repayment of a loan. For example, a property.

Settlement

The completion of the process to sell or purchase a property.

Split loans

Splitting a loan into more than one loan account. For example, a fixed rate loan account and a variable rate loan account.

Stamp duty

Government duty. For example, stamp duty is payable by the buyer on a transfer of land when a property is sold. The amount varies for each State and Territory.

Term

The length of a loan. For example, 30 years.

Valuation

The value of a property as determined by the bank or an independent valuer.

Variable interest rate

Your loan's interest rate could move up or down. If interest rates change, your minimum repayments could too.

 

Phew! Hopefully that will clear a few things up for you. If there’s any terms or lingo you’ve come across during your loan application or research, please contact us and we’ll happily explain!