Banking Glossary Of Terms
Yes, I know that banks try and make it hard. They, just about, use language from another time and another world. It’s like they sat there with a bunch of lawyers and said “how can we make these banking terms as hard to understand as possible”, leaving borrowers dizzy and often on the outer.
Thankfully, we have the internet… many of us research the products that we seek to buy before we commit to the purchase. This isn’t always the case when trying to find a loan. All the research is completed during the buying phase. Often clients research will include, but is not limited to, the suburb data, distance from local schools and shops. Even going as deep as to find out the costs associated with council rates or body corporate rates. Lucky for a prospective home owner this information is reasonably easy to find and easy to decipher. The same cannot be said for home loan terms and conditions!
This is why using a experienced broker team is essential.
There are over 10,000 different type of home loans currently in the market. This figure doesn’t even take into account investment loans. It would take the average person hours, upon hours of research to find the best bespoke solution to meet their individual needs. This is why many give up on finding the best product for them and surrender to the Big 4 banks’, seeking the quickest way to get finance, settling for a mediocre lending product that, more often than not, places them in a bad financial position and is usually an unsuitable loan for their needs.
The purpose of this banking glossary of terms
To put it simply, I want to make it simple and break down the fundamental blocks that exist. The expectation some banking consultants place on their clients to fully understand banking and lending terminology, never ceases to amaze me. It’s not like they speak this lingo on a day to day basis!
This section of the website is created to try to assist the general public looking to do their research. All the terms that we use on a daily basis are here. We will keep adding to the page periodically. If you get stuck and need further clarification, do not hesitate to contact us, using the below contact form.
Application fee/Establishment fee – A fee charged by a lender to process and consider a mortgage application. Ordinarily, this fee is non-refundable and varies between lenders. The fee charged should be advised to you prior to submitting a loan application, in the initial quoting stages.
Assets – A list of what a loan applicant has ownership of. Including, but not limited to, real estate, vehicles, business interests, shares, superannuation, home contents, savings in the bank. A lender requires asset information, along with income details to establish any liability and suitability for a loan.
Basic variable rate loan – A loan interest rate that fluctuates according to the market & lender. The interest rate charged is usually lower to a standard variable rate loan and may include different features. As the name says, basic hence, an offset does not usually come with a basic rate home loan hence, the lower rate.
Best interest duty – Policy that requires lenders and anyone giving financial advice to act in the best interest of their client or customer, ensuring their advice meets their client’s circumstances and objectives. This also goes hand-in-hand with responsible lending.
Borrower – A person or group who receives money from a person, bank or organization with the agreement of the money being paid back over a duration of time, typically with interest
Break costs– An amount payable for the loss imposed on a lender if you were to pay your loan off earlier than the fixed period or if you switch product, refinance, or make additional payments to your loan. It is strongly recommended that you check the estimated break costs are as they can be as high as $20,000.
Bridging finance loan – A special short-term loan that provides access to fund for the in-between of purchasing of a new property and the selling of an existing property. This is very risky and complicated process that is not recommended.
Capital gain – The profit one gains from the sell price of real estate compared to the purchase price. An accountant will calculate an estimate of CGT payable, and it is ordinarily prepared with your tax return. In Australia you do not pay capital gains tax on a property if it has been your primary residence for a duration of approximately 7 years.
Conditional approval – An application for a loan being approved but on the basis that further information is received and meets the lending requirements. Most lenders provided this to you straight away and in most cases the application has not been properly assessed. A good Broker will aim to get you a fully assessed approval or AIP (Approval in principle) which means that you are given the green light to proceed and ready to make the purchase as the lender has properly assessed your application and is satisfied you meet their lending criteria.
Company – A legal entity formed by an individual or group for the purpose of establishing and operating a business.
Comparison rate – A true cost of a loan formed by the calculation of fees charged to a borrower upfront and the interest rate. A comparison rate combines a loan’s interest rate and any fees and charges associated with a lending product. It is important to establish and understand a lenders comparison rate so you can choose and compare products more accurately. The basis lenders rely on to establish their comparison rate is a mortgage amount of $250,000 over 25 years.
Construction loan – A loan type specifically intended to fund the construction of a new dwelling or major renovations to an existing dwelling.
Daily interest – Interest added to the loan balance daily. This amount is determined by the interest rate of your loan divided by 365 days. This is how most lenders charge their interest hence, therefore a fortnightly or weekly repayment is recommended.
Deposit – A cash amount contribution to the purchase price of a property. Lenders ordinarily require a 5% – 20% deposit of the purchase price of a property. The amount of deposit you will require will vary, as well as any schemes available, based on your circumstances.
Deposit bond – An agreement whereby no cash deposit is required and a buyer pledges to pay the purchase price in full upon settlement of a property. A deposit bond can be any amount up to 10% of the value of a property. It simply allows a buyer to purchase a property without using cash from their own account.
Equity – The difference between the value of your mortgage and the monies paid off. For example: Rhonda borrowed $400,000 from the bank for the purchase of her house. She has since paid off $100,000. The property has now been valued at $650,000. Therefore, the total equity amount is $350,000 (Note. A good mortgage broker would try to avoid LMI (Lenders Mortgage Insurance) at all costs. Even though the equity is $350,000, only $220,000 would fall under responsible borrowing and be exempt of any Lenders Mortgage insurance.
Equity loan – A loan that uses the equity of an existing loan as collateral when borrowing for personal use or to purchase investment. It’s recommended you do a complete restructure and refinance to get the bast rate possible for your borrowing needs.
First homeowner grant– A federal government initiative to provide savings to first home buyers. It acts as an incentive to borrow and buy. In Victoria, the FHOG is $10,000 for when you buy or build your first home up to the value of $750,000.
Fixed interest rate– An interest rate that is set for a fixed period. Most common fixed rate periods are 2-4 years. This means the interest payable against a mortgage remains unchanged for the fixed duration, regardless of any market fluctuations. If you were to exit a fixed rate agreement on your loan would be charged an exit fee by the lender.
Freehold title – When the land and house are owned outright. Meaning there is no mortgage secured against a property.
Genuine Savings – Most lenders require 5% Genuine Savings or Gen Savings for short. These are cash funds that a borrower has accumulated and has available for the purpose of purchasing a property and applying for a loan. Genuine savings must have been held in the same account for a duration of 3 months to qualify as genuine savings. Cash gifts, inheritance and/or money received from the sales of goods does not count towards Genuine savings however can be used as Funds to Complete. In short, the banks want to see you have held onto and built on money put away in an account for an extended period. In some circumstances, we can bypass the need for Gen savings – things like rental ledgers can bypass this.
Guarantor – A third party that makes the promise to pay the borrowers debt in the event the borrower is unable. It provides an extra layer of security for the lender. It is not uncommon for parents to become guarantors against their children’s home loans.
Home Builder grant – A monetary grant available to eligible first home buyers or owner/occupiers to build a new home or renovate an existing home.
Interest Only – A loan arrangement whereby the repayments made are only the interest payable amount. This usually means it will take longer to pay off the total loan but can be beneficial when wanting to invest and build on your property portfolio.
Introductory rate – A special rate a lender offers for a short period of the loan. It can vary between banks but is usually applied for the first 12 months. It acts as an incentive for a borrower to choose a specific lender.
Joint tenants – When there are two people listed as the owners of a property.
Lender Mortgage insurance – LMI is an amount, determined by your circumstances, payable to a bank, usually at time of settlement of a loan, for the purpose of security to the bank when you borrow more than 80% of a property value. It is protection for the bank and not the borrower.
Liabilities – The debts owed by a person. These include real and credit amounts. A part of the application process, a lender will investigate and assess any liabilities of an applicant, including credit checks. Did you know that using Afterpay and services alike will be used to calculate your total liabilities?
Line of credit – Similar to an equity loan where a specified amount of equity can be used at a borrower’s discretion. Depending on your financial circumstances, a limit will be set to the amount of money you can access. As you pay off the money you use, you can continue to access funds up to the limit amount.
Loan to Valuation Ratio (LVR) – Loans available to borrowers who may not have complete or valid financial information available at the time of applying for a loan. To put it in simple terms it’s the amount of money you need to be able to borrow for the purpose of purchasing a property.
Low Doc loan– This stands for Low Documentation Loan which is primarily used for self employed or companies. Instead of having to provide all the usual information required in the application process, they are only required to provide limited information. This does, however, attract a higher rate then normal due to the increased liability associated to the lack of full financial disclosure.
Mortgage – An agreement whereby a lender provides funds to borrower for the purpose of purchasing real estate and the borrower agrees to meet the financial requirements of the mortgage agreement.
Mortgagee – The body, most commonly a bank, that lends the money required to a borrower. In Australia, there are approximately 40 different lenders available to borrow from.
Mortgagor– A person or parties that borrows money from a lender for the purchase of a property.
Negative Gearing – When you borrow money to purchase an investment property or asset. Negative gearing enables you to claim losses when the expenses of a property, including interest, council rates, body corporate fees, land tax, maintenance etc, exceeds that of the income received from the investment/property. It, therefore, means less tax is payable on the investment
Non conforming loan– Special loans available from select lenders for borrowers who do not ordinarily meet the lending requirements. Lenders will normally enforce mandatory Lender mortgage insurance to the terms of the loan agreement.
Offset Account – A secondary account linked to the home loan account, where the balance of this account offsets the balance of the home loan, allowing the borrowers to reduce on interest paid. Offset accounts are beneficial as they enable a borrower to save thousands off interest paid and reduce the life of a loan.
Ombudsman– An official body whose role is to investigate complaints made against a business, company, or organisation.
Positive Gearing– The opposite to negative gearing, whereby you borrow money to invest in a property and the income received from the property exceeds the interest payable on the borrowed money. Although you are benefiting from a higher investment return, it means the tax payable on the investment is also greater.
Pre-approval– One of the most important steps in preparing to purchase a property. This is when a lender agrees to lend you a sum of money for the purchase of a property. However, this is not a final approval, as a property valuation is required. It allows you to know how much you can borrow, which assists with narrowing down potential properties.
Principal– The money or loan amount you have borrowed from a lender and subsequently agree to pay back.
Principal and Interest – Paying back the agreed repayments on a loan plus the interest (cost) of borrowing the principal amount.
Redraw facility – Provides access to money you have paid off a loan. It can also help you reduce the amount of interest you pay. Although, you have immediate access to the redraw facility funds, we always recommend you avoid using them if possible.
Refinancing – Changing your lending product with the same or different lending institution. Usually, for the purpose of finding better interest rates or to make a purchase. We always recommend checking with your broker about any additional charges/exit fees that may apply. Our advice always is to investigate the option of refinancing every two years to ensure you are getting the best possible outcome for your dollar.
RBA – The Reserve Bank of Australia is Australia’s central bank, who’s role is to create financial stability for the country by monitoring and enforcing monetary policy with the goal to create financial, employment and welfare stability amongst its’ citizens. The RBA determines the national cash rate which is used by Banking co-operations as a guide for the percentage of interest they apply to their lending products.
Responsible lending – A term used to describe a lender offering a product to a customer that is suitable to their circumstances and serviceability. For example, a bank cannot offer a product to a customer if the financial situation of that customer would mean they would have difficulty meeting the requirements of the loan. This would not fall under the umbrella of responsible lending.
Security – Much like a guarantor, loan security means collateral such as a property or financial interest will be used to meet the loan amount. If a borrower forfeits on their obligations to servicing a mortgage, then a lender is at liberty to recoup funds payable from interests secured against the mortgaged property.
Settlement date – The date a borrower finalises payment of a property and takes full possession. This process involves the services of a Conveyancer whose role it is to ensure payment is made to discharge any debts held against a property, including but not limited to, council rates, utilities, body corporate fees, any mortgages, agent fees and commissions prior to a new owner takes full possession of the property.
Stamp duty – A tax paid on the purchase of a property. The amount payable is determined by the purchase price, location and loan type and set by each individual state and territory. In Victoria the amount ranges from 1.4% – 6% of the total purchase price.
Stamp duty incentive – An incentive for first home buyers, whereby a reduction on the tax due for the purchase of a property is significantly reduced.
Standard variable loan – A loan product that applies an interest rate determined by the market and lender. This means your rate can and will fluctuate over the life of the loan. It’s good to keep in mind that even though the cash rate which is determined by the RBA, may go down, it does not mean your bank will apply any reductions on the interest rate they charge. However, it can provide flexibility for a borrower with differing terms of a loan.
Strata title – A type of land title when there are more than one dwelling on one property title
Survey – Land boundaries and buildings displayed on a plan. This must form part of a Section 32 when selling or buying a property.
Tenants in common – Where there is a joint interest in a property and each owner has independent rights/interests in their portion of the property.
Term – The length of a loan. A standard term of a loan is 25 years and forms part of a lender’s base calculations for the cost and serviceability of a loan.
Title search – A search conducted with the Lands Titles Office to determine the specific ownership of a property. Including, but not limited to, covenants, encumbrances and easements.
Torrens title – The most common property title that means the listed person/s own the land and building
Unconditional approval – A loan application approved on a final basis and a lender willing to lend the approved amount of money to a borrower.
Unencumbered – Where a loan or person is free of debt or other financial liability.
Valuation – Determining the estimated worth of a property. A bank requires a formal valuation as part of the application process to determine an accurate lending amount.
Variable interest rate – A rate that is not secured, meaning the interest rate applied to a loan fluctuates and changes, based on market influence. Although the market may influence the rate, banks are not a liberty to pass on any rate reductions that the RBA applies to the cash rate. It also means a borrower is vulnerable to rate increases if the cash rate rises.
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