Finance Dictionary
APRA
The Australian Prudential Regulation Authority (APRA) are the body that oversees all lenders, banks, credit unions, building societies, general insurers, life insurers, reinsurance firms, private health insurance companies and most superannuation funds in australia.
ASIC
The australian securities and investment commission are the body that regulates financial services, markets and corporate. they manage australia’s economic reputation by ensuring our markets are fair and transparent.
ASSESSMENT
assessment or credit assessment refers to the process the lender undertakes to review your application for a loan and determine whether or not they will lend you the money.
AUSTRALIAN CREDIT LICENCE (ACL)
issued by asic, anyone engaging in credit activities in australia must operate under an australian credit licence (acl).
BRIDGING FINANCE
a loan that allows you to buy a new property before you have sold your old property. sometimes bridging finance (or a bridging loan) is required because your settlement dates don’t line up and you have multiple mortgages to pay at the same time.
CASH FLOW
refers to how you earn, how you use your money including how much is saved, spent or invested.
serviceability: this sounds simple but in reality is affected by a range of different factors including:
your income
how much you are borrowing
what your living expenses are
how much you have in debt already
the lender will add all of your income together including salary, investments and rental income and subtract all of your existing debts as well as the new loan you are applying for to give them the net income surplus (nis) score (debts are calculated at a much higher rate than the actual repayments to allow a buffer for interest rate rises). if your nis is positive then they will determine that you can service the loan and will generally respond favourably. during their assessment of your loan they may also look at your occupation, your employment history, your credit score, savings history, ability to pay your debt and bills and more.
CASH OUT
getting cash out of your home loan generally refers to accessing equity. this is calculated on the difference between what you owe (or the principal of your home loan) and what the property is currently valued at – the difference is referred to as equity. many lenders have different values that they will let you ‘cash out’. remember, anything you re-borrow or cash out must be repaid. if you are borrowing up to 80% of the property value then you may not need to show evidence of what you are using the cash for, you just provide a statement of intent. if you are borrowing up to 90% of the property value then the lender will require you to provide evidence of what you are using the funds for e.g. renovation, investment or debt consolidation.
CONDITIONAL APPROVAL
a lender will issue conditional approval when they are happy to offer you a home loan subject to certain criteria being met or documentation being supplied – this might include additional payslips, confirmation of employment or even a valuation on the property.
CONVEYANCER
in all property transactions a conveyancer or solicitor is required to check contracts, transfer titles, protect their clients interests, book settlements and ensure settlement disbursements occur as planned. both vendor and purchaser are required to have a conveyancer or solicitor.
CREDIT GUIDE
anyone who engages in credit activities (like a mortgage broker) in australia must provide their clients with a credit guide. the credit guide includes their licencing information, and their dispute resolution process.
CREDIT POLICY
each lender will have a set of criteria they must follow when assessing loans, this is their credit policy. it gives guidance to the credit assessors around what criteria an applicant must meet for their loan to be approved. credit policy covers a wide range of things including employment (e.g. whether they will accept such as casual income) and where you live (e.g. if you are living overseas and investing here, or are an expat), among others.
CREDIT REPRESENTATIVE
an individual or company that is appointed to operate as a representative under an australian credit licence (acl).
DEPOSIT
a deposit refers to the amount of money you are contributing upfront to your property purchase. if you are buying a home worth $500,000 and want to borrow 80% of the property value then you would need a deposit of $100,000 (this means you also avoid paying lenders mortgage insurance)
DEPOSIT BOND
a deposit bond acts as a guarantee to the vendor that the purchaser can provide a deposit on the property they are purchasing. a deposit bond will be used when someone doesn’t to or can’t provide their deposit upfront (usually around 10%). reasons might be the deposit is tied up in investments or term deposits that have not yet matured, they are waiting to sell another property or are waiting on a cash gift.
EQUITY
the difference between what you owe (or the principal of your home loan) and what the property is currently valued at – if this figure is positive, then the difference is referred to as equity. many people utilise the equity in their property when purchasing an investment.
FINANCE BROKER
a business or individual who compare a range of different finance products (such as home loans, personal loans, car finance or insurance) for their clients.
FIRST HOME BUYER (FHB)
someone who has never purchased or owned property before.
FIRST HOME OWNERS GRANT (FHOG)
this is a concession, grant or rebate available for first home buyers introduced in 2000 designed to help offset the gst payable. check your individual state revenue office for qualification criteria.
FIXED RATE
a home loan interest rate that does not change for a set period of time (e.g. 2 years) and can apply to all or part of the loan. when the banks change their interest rates the fixed part of your home loan will not change. these rates are usually higher than variable rates, however offers added security that you know what your repayment will be each month. the downside is if interest rates drop, your fixed rate will not drop.
GUARANTOR
a guarantor is someone who uses the equity from a property they own as security against the loan being taking out. read more about guarantors here.
INTEREST ONLY repayments
as the name suggest, an interest only home loan means when you make your repayments each month you are only paying the interest charged on the loan and not any of the principal. as a result, the amount owing at the end of the interest only term will be the same as the beginning of loan.
INTEREST RATE
the percentage (%) of interest that is charged on your home loan that you must pay in each repayment.
INVESTMENT PROPERTY
a property you are buying with the expectation that you will receive a positive financial return at some stage in the future. not a property that you are intending to necessarily live in yourself, although any property purchase is theoretically an investment in your future wealth.
INVESTOR
an investor is someone who purchases property with the expectation that they will receive a financial return in future. there are multiple investment strategies you may consider, read our article on capital growth vs rental yield here.
LENDERS MORTGAGE INSURANCE (LMI)
if you have a Loan to Value ratio (lvr) of 80% or greater, then you will be required to pay lenders mortgage insurance. this insurance protects the lender in the event that the borrower defaults on the loan and selling the property doesn’t recover the lenders costs. lmi does not protect the borrower.
LOAN VALUE RATIO (LVR)
an lvr, whilst sounding complex is quite simple. it refers to how much you are borrowing from the bank against the value of your property. if you buy a property worth $600,000 and borrow $480,000 to buy it, then your lvr is 80%.
LOW-DOC LOAN
these loans are primarily designed for self-employed people, and as the name implies, have lower documentation requirements then a regular loan. the trade off is that these loans usually carry a higher interest rate as the lender perceives these to be higher risk loans as they have not been able to see your full financial and cash-flow position.
MORTGAGE BROKER
a business (like entourage) or an individual who compares a range of different home loan products to help their clients find the product they feel is best suited. most mortgage brokers offer a service that is free for their customers as they receive a commission from the lender they organise the home loan with.
OFFSET ACCOUNT
an offset account is a bank account that is linked to your home loan an for every $1 you have in the account, the lender will offset this against your mortgage. this means they are calculating your interest rate on the principal owing minus whatever is in your offset account. read more about offset accounts here.
OWNER OCCUPIED
a property you are buying to live in or currently own and are living in.
PRE-APPROVAL
we recommend all of our clients get one of these. a pre-approval is issued after a lender completes a preliminary assessment of your serviceability and will indicate what they would lend to you based on your current circumstances. this means you can bid at auction or make an offer knowing what you can borrow. once you have purchased we will convert your pre-approval to a full loan application.
PRINCIPAL & INTEREST
a principal and interest loan means you are paying both the interest and the principal on the home loan. this means you will be reducing how much you owe the bank each month i.e you are paying down your principal.
REDRAW
you may have a redraw facility attached to your home loan that allows you to withdraw any extra payments you have made on your loan.
REFINANCE
the process of moving your loan from one lender to another typically for a lower interest or improved product features that will ultimately save money on the loan.
RENTVESTING
when a person is renting the home they live in, but owns an investment property they are renting to someone else. read more here.
SECTION 32
this is the document provided by the vendor selling a property to a potential purchaser in Victoria. this is required to be given to the purchaser before they buy the property (or make an offer) and it’s a great idea to get a conveyancer to check this for you. things outlined in the section 32 include finance terms (whether your offer is subject to finance or not), how long the settlement is (30, 60 or 90 days are common), who the person selling the property is (it’s good to check that they are entitled to sell the property) and lots more.
SECURITY
this refers to the property that the loan you apply for is held against. if you have a guarantor there is a primary security (the property you are purchasing) and a secondary security (the property of your guarantor).
SETTLEMENT
settlement is the process of property being transferred from vendor to purchaser. this includes transferring titles, paying rates and water, paying the vendor the balance owing on the property and usually when interest begins being calculated and your home loan repayments begin.
STAMP DUTY
this is tax paid to the state government (each state has a different calculation) when you purchase a property.
SWITCHING LOANS
see refinance. this may also mean you are changing the type of loan you have at your current lender (for example switching from variable to fixed).
UNCONDITIONAL APPROVAL
unconditional or formal approval occurs when the lender is confident you have satisfied all of their requirements and they are going to lend you money for your property purchase. this is the step prior to loan document signing and settlement, when the loan is actually drawn down and your repayments commence.
VALUATION
all lenders will require an independent valuation on the property you are purchasing. this ensures they are not lending you more than the property is valued for and helps inform what the loan value ratio (lvr) is.
VARIABLE RATE
a home loan interest rate that is subject to change each month (this could go up or down) and can apply to all or part of the loan. if the banks change their interest rates then your variable rate will be affected.