Mortgage Glossary

The Zanda Wealth Mortgage Brokers mortgage glossary is a comprehensive resource designed to demystify the complex world of mortgage and property finance. It offers clear, concise definitions, helping you understand everything from the intricacies of amortisation to the specifics of various loan types. This glossary is your guide to making informed decisions on your property journey.

Amortisation

This term refers to the process of gradually reducing a debt through scheduled, periodic repayments of principal and interest. In the context of a mortgage, it means paying off the loan over time until the balance is zero.

Amortisation Period

The amortisation period is the total length of time it takes to pay off a mortgage in full. It’s typically expressed in years, and the duration affects the size of the regular repayment amounts, with longer periods resulting in lower monthly payments.

Application fee / Establishment fee

This is a one-time fee charged by lenders to cover the cost of processing a new loan application. It varies between lenders and can cover services like credit checks, property appraisals, and administrative expenses related to the establishment of the mortgage.

Arrears

Arrears occur when a borrower falls behind on their mortgage repayments. It represents the amount overdue, which typically accumulates from the date the payment was missed. Persistent arrears can lead to legal actions by the lender, including foreclosure.

Assets

Assets are items of value owned by an individual or entity. In mortgage contexts, they include cash, real estate, investments, vehicles, and other valuable possessions. Lenders assess assets to determine a borrower’s net worth and ability to repay the loan, influencing loan approval and terms.

Bankruptcy

Bankruptcy is a legal process where individuals or entities unable to meet debt obligations seek relief from some or all of their debts. In the context of mortgages, bankruptcy can affect an individual’s ability to obtain a loan, as it typically reflects a higher credit risk.

Borrowing Power Calculator

This online tool helps prospective borrowers estimate how much they can borrow based on their financial situation. It considers income, expenses, existing debts, and other factors to provide an indicative borrowing capacity, aiding in the mortgage planning process.

Bridging Loan 

A bridging loan is a short-term financing solution used to cover the financial gap when purchasing a new property before selling an existing one. These loans are usually arranged quickly but carry higher interest rates. They provide temporary funding during the transition between properties.

Budget Planner Calculator

This online tool helps individuals plan their finances by estimating monthly income and expenditures. It’s particularly useful for prospective homebuyers to understand their financial capacity for mortgage repayments and associated homeownership costs.

Buying and Selling Costs Calculator

This calculator provides an estimate of the costs involved in buying a new property and selling an existing one. It factors in expenses like stamp duty, legal fees, agent commissions, and other transaction-related costs, aiding in financial planning for property transactions.

Capital Gain

Capital gain refers to the profit made from selling a property for more than its purchase price. It’s a key consideration in property investment, as capital gains can be subject to tax. However, the primary residence is often exempt from capital gains tax under certain conditions.

Capital Gains Tax (CGT)

This tax is levied on the profit made from selling a property or investment. The tax is calculated on the difference between the selling price and the purchase price, after accounting for associated costs. CGT exemptions may apply, particularly for primary residences under specific conditions.

Cashflow Forecast

A cashflow forecast is a financial tool used to predict the flow of money in and out over a future period. It’s essential for property investors and homeowners to anticipate income, expenses, and their capacity to meet mortgage repayments and other financial obligations.

Cashflow Statement

This financial statement details the actual flow of cash in and out over a specific period. For property owners and investors, it includes income (like rent) and expenses (such as mortgage repayments, maintenance costs), providing a clear picture of financial performance and position.

Caveat

A caveat is a legal notice registered against the title of a property, indicating that a third party claims some right or interest in it. It’s often used to protect a financial interest in the property, preventing the owner from selling or dealing with the property without acknowledging the claimant’s rights.

Certificate of Title (C/T)

This legal document provides evidence of ownership of a property. It includes details like the owner’s name, property description, and any encumbrances or easements. The Certificate of Title is crucial in property transactions as it verifies the seller’s right to sell the property.

 

Collateral

Collateral refers to an asset that a borrower offers to a lender as security for a loan. In the case of a mortgage, the property being purchased typically serves as collateral. If the borrower fails to repay the loan, the lender may seize and sell the collateral to recover the owed amount.

Comparison Rate

The comparison rate combines the interest rate of a loan with most of its fees and charges, converting these into a single percentage figure. This rate provides a more comprehensive representation of the true cost of the loan, making it easier to compare different mortgage products.

Construction Loan

A construction loan is a short-term loan used to finance the building of a new home or substantial renovations. It differs from a traditional home loan in that funds are typically released in stages as construction progresses, and interest is usually only charged on the amount drawn down.

Contract of Sale (COS)

The Contract of Sale is a legally binding document outlining the terms and conditions of a property sale. It includes details like the sale price, deposit amount, settlement date, and any conditions or contingencies. Once signed by both the buyer and seller, it commits both parties to the transaction.

Conveyancing

Conveyancing is the legal process of transferring property ownership from one party to another. It involves preparing and reviewing legal documents, conducting property searches, and ensuring all legal and financial obligations are met for a smooth transfer of the property title.

Covenant

In real estate, a covenant is a legal obligation or restriction written into the title or deed of a property. It dictates how a property can be used or restricts certain activities (e.g., types of structures that can be built). Covenants are binding and enforceable by law.

Credit Ombudsman Service Limited

This was an independent dispute resolution service that provided consumers and small businesses with a free and impartial means to resolve complaints about credit, finance, and banking services. It was replaced by the Australian Financial Complaints Authority (AFCA) in 2018.

Credit Report

A credit report is a detailed record of an individual’s credit history, compiled by credit bureaus. It includes information such as credit accounts, repayment history, credit inquiries, and any defaults or bankruptcies. Lenders use this report to assess an individual’s creditworthiness when applying for a mortgage.

Credit Score

This is a numerical representation of an individual’s creditworthiness, derived from the analysis of their credit report. Scores range from low to high, with higher scores indicating better credit health. A high credit score can improve the chances of loan approval and securing favourable terms.

Creditor

A creditor is an entity (person or institution) that extends credit by lending money to another entity, known as the debtor. In the context of mortgages, the lender (e.g., a bank) is the creditor, providing the loan for the borrower to purchase a property.

Default

Default occurs when a borrower fails to meet the legal obligations of a loan, typically by not making scheduled repayments. This can lead to legal proceedings and potentially the seizure and sale of the collateral (property) by the lender to recover the outstanding debt.

Deposit

In real estate transactions, a deposit is an upfront payment made by the buyer to demonstrate commitment to the purchase. It’s typically a percentage of the purchase price and is held in trust until settlement. The deposit is credited towards the total purchase price at settlement.

Deposit Bond

A deposit bond is a guarantee, issued by an insurance company or bank, to the seller on behalf of the buyer. It acts as a substitute for a cash deposit, guaranteeing that the buyer will pay the full purchase price by the settlement date. It’s often used when the buyer’s funds are tied up elsewhere.

Deposit Planner Calculator

This tool helps prospective home buyers determine how long it will take to save for a home deposit. By inputting savings goals, current savings, and regular contributions, the calculator provides an estimated timeline for reaching the desired deposit amount.

Discharge

Discharge of a mortgage occurs when the borrower has fully repaid the loan, and the legal mortgage over the property is removed. This process involves the lender providing a discharge document, which clears the title of the property, signifying that the borrower now owns the property free of the mortgage.

Effective Interest Rate

The effective interest rate represents the true cost of borrowing, including the nominal interest rate and the effects of compounding over a specific period. It’s often higher than the advertised rate due to the inclusion of compounding interest, providing a more accurate reflection of the total cost of a loan.

Encumbrance

An encumbrance is a claim or liability attached to a property, which may restrict its use or transfer. Examples include mortgages, liens, or easements. Encumbrances can affect the property’s value and a buyer’s ability to obtain clear title upon purchase.

Equity

Equity in a property is the difference between the property’s current market value and the amount owed on its mortgage. It represents the portion of the property that the owner truly owns. As the mortgage is paid down or as property values increase, equity typically grows.

Equity Loan

An equity loan allows homeowners to borrow against the equity they have built up in their property. This type of loan can be used for various purposes, such as home renovations, investing, or consolidating debts. The amount available to borrow depends on the property’s current value and the outstanding mortgage balance.

Expense Planner Calculator

This tool assists individuals in managing their finances by estimating and organising their expenses. Users input their regular expenses such as utilities, groceries, and loan repayments. It’s especially useful for prospective homeowners to understand and plan for the ongoing costs associated with property ownership.

First Home Buyer Loans

These are mortgages specifically designed for first-time homebuyers, often featuring lower deposit requirements, reduced fees, or other incentives. These loans aim to make entering the property market more accessible for new buyers.

First Home Loan Deposit Scheme

This government initiative helps first-home buyers purchase a home sooner. Under the scheme, eligible buyers can purchase a property with a deposit as low as 5%, with the government guaranteeing up to 15% of the loan to avoid the cost of Lenders Mortgage Insurance.

First Home Owners Grant

A national scheme providing a one-off grant to eligible first-time homebuyers to assist with the costs of purchasing or constructing a new home. The amount and conditions vary by state but aim to offset costs like stamp duty and contribute to the deposit.

Fixed Interest Rate

A fixed interest rate on a loan means the rate remains unchanged for a specified period, ensuring consistent repayment amounts. This provides certainty for budgeting, as the borrower is not affected by interest rate fluctuations during the fixed term. After this period, the loan usually reverts to a variable rate.

Foreclosure

Foreclosure is a legal process where a lender takes possession and sells a property after the borrower fails to meet their loan repayments. It typically occurs as a last resort when all other attempts to recover the debt have failed, resulting in the borrower losing their property.

Freehold Title

A freehold title gives the owner complete ownership of the property and the land on which it stands, indefinitely. It contrasts with leasehold, where ownership is for a fixed term. Freehold owners have the right to modify, sell, or lease their property as they see fit, subject to legal regulations.

Future Planning

In the context of mortgages and property ownership, future planning involves strategising for long-term financial commitments and potential changes in circumstances. It includes considering factors like interest rate changes, personal financial goals, property market trends, and potential changes in income or family situation.

Gross Income/Profit

Gross income, in the context of mortgage applications, refers to the total income earned by an individual before deductions like taxes and superannuation contributions. For businesses, gross profit is the revenue minus the cost of goods sold, before accounting for other expenses. It’s a key factor in determining borrowing capacity.

Guarantor

A guarantor is a person who agrees to be responsible for paying a loan if the primary borrower fails to do so. In home loans, a guarantor often secures the loan by offering their own property as additional security. This arrangement is common when the primary borrower has insufficient deposit or wants to avoid Lenders Mortgage Insurance.

Home Loan Calculator

This online tool helps prospective borrowers estimate their mortgage repayments. By inputting the loan amount, interest rate, and loan term, the calculator provides an approximation of monthly, fortnightly, or weekly repayments, aiding in financial planning for a home purchase.

Home Loan Comparison Calculator

This calculator allows users to compare different home loan products side by side. It takes into account variables like interest rates, fees, and features of various loans, helping borrowers to make an informed decision on which loan best suits their needs and financial situation.

Home Renovation Loans

These are specific types of loans designed to finance home improvements or renovations. They can be secured against the equity in a property or structured as a personal loan. Such loans are often used to increase the value of a property or to make a home more suitable to the owner’s needs.

Income Tax Calculator

This tool helps individuals estimate the amount of income tax they need to pay based on their annual income. Users input their gross income and deductions to calculate their taxable income, which is then used to determine the tax payable according to current tax rates and brackets.

Interest

In the context of a mortgage, interest is the cost paid to the lender for borrowing money, typically expressed as an annual percentage of the loan amount. It is one of the primary costs associated with taking out a loan, alongside any fees or charges.

Interest Only (IO)

An interest-only loan is a mortgage where the borrower pays only the interest on the principal balance, usually for a fixed period at the start of the loan term. This results in lower monthly payments initially, but the principal amount does not decrease during the interest-only period.

Interest-Only Investment Loans

These loans are tailored for property investors, allowing them to pay only the interest on the loan for a fixed period, typically 1-5 years. This reduces the initial repayment amount, which can be beneficial for cash flow, especially in rental investments. However, the principal balance remains unchanged during this period.

Interest Rates

Interest rates are the cost of borrowing money, expressed as a percentage of the loan amount. They can be fixed, variable, or a combination of both. The rate influences the total cost of a loan and the size of regular repayments. Rates vary based on factors like market conditions, lender policies, and the borrower’s creditworthiness.

Investment Loan

An investment loan is used to purchase property intended for investment purposes, such as rental properties or real estate for capital gain. These loans often have different terms and interest rates compared to owner-occupier home loans, reflecting the higher risk associated with investment properties.

Joint Tenancy

This is a form of property co-ownership where two or more individuals hold equal shares in the property with a right of survivorship. In joint tenancy, if one owner dies, their share automatically passes to the surviving owners, bypassing a will or estate distribution.

Lenders’ Mortgage Insurance (LMI)

LMI is insurance that protects the lender in case the borrower defaults on their home loan. It is typically required when the borrower’s deposit is less than 20% of the property’s purchase price (i.e., a loan-to-value ratio greater than 80%). While it protects the lender, the premium is usually paid by the borrower.

Liabilities

Liabilities refer to any debts or financial obligations an individual or entity owes. In the context of mortgages and property, liabilities can include existing loans, credit card debts, and other financial commitments. They are considered by lenders when assessing a borrower’s capacity to repay a home loan.

Line of Credit

A line of credit is a flexible loan arrangement where a lender approves a maximum amount of credit to the borrower, who can then access funds as needed, up to the approved limit. Interest is usually charged only on the amount used. It’s often used for ongoing expenses, like home renovations or investment opportunities.

Loan

A loan is a sum of money borrowed from a lender, which is expected to be paid back with interest over a specified period. In real estate, loans are used to finance the purchase of properties, and the property often serves as collateral for the loan.

Loan & Lender Fees

These are additional costs associated with taking out a loan, apart from the principal and interest. They can include application fees, establishment fees, ongoing account-keeping fees, and discharge fees, among others. These fees vary by lender and loan type and can significantly affect the total cost of the loan.

Loan Refinance Calculator

This tool helps borrowers assess the benefits and costs of refinancing their current mortgage. By inputting details about their existing loan and the potential new loan, including interest rates and fees, users can compare monthly repayments and total loan costs to determine if refinancing offers financial benefits.

Loan Repayments

Loan repayments are the regular payments made to pay off a loan. They typically include both principal and interest components. The amount and frequency of these repayments depend on the loan amount, interest rate, and loan term. Consistent repayment is crucial to avoid default and additional charges.

Loan Term

The loan term is the length of time over which a loan is scheduled to be repaid. Common terms for home loans range from 15 to 30 years. The length of the loan term affects the size of the repayments and the total amount of interest paid over the life of the loan.

Loan to Valuation Ratio (LVR)

LVR is the proportion of money borrowed compared to the lender’s valuation of the property, expressed as a percentage. For example, an LVR of 80% means the loan is 80% of the property’s value. Higher LVRs often require Lenders’ Mortgage Insurance (LMI) as they are considered riskier.

Low Documentation (Low Doc) Loan

A Low Doc loan is designed for borrowers who cannot provide the traditional proof of income required for standard loans, often self-employed or small business owners. These loans typically require less documentation but may come with higher interest rates and require a larger deposit due to the increased risk to the lender.

Maturity

Maturity refers to the date when a loan’s term ends and the remaining balance must be paid off in full. For a mortgage, this is the point at which all scheduled payments have been made and the borrower has fulfilled their repayment obligations, resulting in the release of the lien on the property.

Mortgage

A mortgage is a type of loan specifically used to purchase real estate. The property being purchased serves as collateral for the loan. If the borrower fails to repay the loan according to the agreed terms, the lender has the right to seize and sell the property to recover the debt.

Mortgagee

The mortgagee is the lender in a mortgage agreement, typically a bank or financial institution. They hold the property’s title or a lien on the property as security for the loan. If the borrower defaults on their mortgage payments, the mortgagee has the right to take legal action to recover the outstanding loan amount.

Mortgagor

The mortgagor is the borrower in a mortgage agreement. They pledge the property as collateral for the loan. The mortgagor is responsible for making regular repayments on the loan and maintaining the property, adhering to the terms agreed upon with the mortgagee.

National Consumer Credit Protection Act

This Act is comprehensive legislation designed to protect consumers in credit transactions and ensure fair and transparent financial dealings. It includes responsible lending obligations for lenders and brokers, providing safeguards to consumers against unsuitable credit products and practices.

Negative Gearing

Negative gearing occurs when the income generated by an investment property (e.g., rent) is less than the expenses associated with owning and managing the property, including interest on the loan. This loss can often be offset against other income for tax purposes, potentially reducing the investor’s taxable income.

Offset Account

An offset account is a savings or transaction account linked to a mortgage account. The balance in the offset account is used to offset the balance in the mortgage account, reducing the interest payable. For example, if you have a mortgage of $500,000 and $20,000 in your offset account, you only pay interest on $480,000.

Personal Loan Calculator

This tool helps individuals calculate the repayments and total cost of a personal loan. Users input the loan amount, interest rate, and term to receive detailed information on repayment amounts, duration, and the total interest payable over the life of the loan.

Pre-Approval

Pre-approval, also known as conditional approval, is an indication from a lender stating how much they might be willing to lend based on a preliminary assessment of the borrower’s financial situation. This is not a guarantee of loan approval but helps buyers understand their borrowing capacity and bid or negotiate on properties with confidence.

Principal

The principal is the actual amount of money borrowed from a lender to purchase a property. Over the life of the loan, the borrower repays the principal, along with interest. Early in the loan term, payments are primarily interest; later, more of the payment goes towards reducing the principal.

Principal and Interest Investment Loans

These loans require the borrower to repay both the principal (the amount borrowed) and interest over the life of the loan. They are commonly used for property investment, with regular repayments gradually reducing the loan balance and building equity in the property.

Property Investing

Property investing involves purchasing real estate with the intention of generating rental income or capital appreciation. It can include residential, commercial, or industrial properties. Successful property investing typically requires careful market analysis, financial management, and an understanding of factors influencing property values.

Redraw Facility

A redraw facility is a feature of some home loans that allows the borrower to withdraw extra repayments they have made on their loan. This provides flexibility, as borrowers can access additional funds they have paid over and above their required repayments, subject to the lender’s terms and conditions.

Refinance Loans

Refinance loans involve replacing an existing loan with a new one, often to take advantage of lower interest rates, better loan features, or to consolidate debt. This can result in more favourable repayment terms, reduced total interest costs, or the release of equity built up in the property.

Refinancing

Refinancing is the process of taking out a new loan to pay off one or more existing loans. It is often done to secure a lower interest rate, alter the loan term, switch from a fixed-rate to a variable-rate loan or vice versa, or to consolidate debt. Careful consideration is needed to ensure it’s financially beneficial.

Reverse Mortgage

A reverse mortgage allows homeowners, typically seniors, to borrow money using the equity in their home as security. The loan, along with interest and fees, is repaid when the borrower sells the home, moves out, or passes away. It provides income but reduces the equity in the home.

Security

In the context of loans, security refers to an asset pledged by the borrower to the lender as collateral for the loan. In a mortgage, the property being purchased or refinanced typically serves as security. If the borrower defaults on the loan, the lender can seize and sell the security to recover the outstanding debt.

Self-Managed Superannuation Fund (SMSF) Loan

An SMSF loan is a type of loan used by a Self-Managed Superannuation Fund to purchase investment properties. The property is held in trust for the SMSF, which pays off the loan over time. These loans are subject to specific regulations and restrictions under superannuation law.

Serviceability

Serviceability refers to a borrower’s ability to meet loan repayments, based on their income, expenses, debts, and other financial commitments. Lenders assess serviceability before approving a loan to ensure the borrower can comfortably manage the repayments without experiencing financial hardship.

Settlement

Settlement is the final stage in the property buying process where the legal ownership is transferred from the seller to the buyer. It involves the payment of the purchase price, minus the deposit already paid, and the transfer of the property title. Settlement dates are typically set in the contract of sale.

Split Loan Facility

A split loan facility allows borrowers to divide their mortgage into two separate accounts: one with a fixed interest rate and the other with a variable rate. This approach provides a balance between the security of fixed repayments and the flexibility of variable rates, allowing borrowers to tailor their loan to their financial needs and risk preferences.

Stamp Duty

Stamp duty is a state government tax on property transactions, payable by the buyer. The amount varies based on the property’s purchase price and location, as well as the buyer’s status (e.g., first-time buyer, investor). It’s a significant cost in the property buying process and must be factored into budgeting.

Stamp Duty Calculator

This online tool helps potential property buyers calculate the stamp duty they will need to pay on a property purchase. By entering details such as the property’s value and location, the calculator provides an estimate of the stamp duty costs, aiding in financial planning for property acquisition.

Standard Variable Loan

A standard variable loan is a mortgage with an interest rate that fluctuates over time, typically in response to changes in the market and the lender’s standard variable rate. This type of loan offers flexibility, such as the ability to make extra repayments or access a redraw facility, but also entails uncertainty in repayment amounts.

Strata Title

A strata title is a form of ownership for units or apartments within a multi-unit complex. It gives the owner legal ownership over a small portion of a larger property (like an apartment or townhouse) and shared ownership of common areas (e.g., gardens, swimming pools). Strata titles also involve paying fees for common area maintenance and adherence to body corporate rules.

Surety

In lending, surety refers to a person who guarantees the loan repayment on behalf of the borrower. If the borrower fails to repay the loan, the surety is legally obligated to cover the debt. This is common in scenarios where the borrower may not meet the standard lending criteria on their own.

Tenants in Common

This is a form of co-ownership where two or more individuals own separate shares in a property. These shares can be equal or unequal, and each tenant in common can dispose of their share independently, such as through sale or in a will. Unlike joint tenancy, there is no right of survivorship.

Title Search

A title search is a legal process conducted to determine the rightful owner of a property and to uncover any encumbrances or restrictions on the property. It is a crucial step in the property buying process to ensure the seller has the right to sell and to identify any issues that might affect the property’s use or value.

Top up Facility

A top-up facility allows borrowers to increase the amount of their existing loan. This feature is useful for accessing additional funds without needing to take out a new loan. Top-ups are often used for purposes like home renovations or purchasing additional property, but they depend on the borrower’s financial situation and equity in the property.

Torrens Title

Torrens Title is a system of land registration and ownership where the state keeps a register of land holdings. This system simplifies the process of transferring land and provides greater certainty of ownership. Under a Torrens Title, the registered owner has indefeasible title to the property, barring fraud.

Variable Interest Rate

A variable interest rate on a loan means the rate can fluctuate over time, typically in line with changes to market interest rates. This can result in varying loan repayments throughout the loan term. Variable rates offer flexibility, such as the ability to make extra repayments or access features like an offset account.