Encyclopaedia of Home Loan Terms: Master The Financial Lingo

Embarking on the journey of home ownership is both exhilarating and daunting, with a myriad of processes and decisions that can seem overwhelming without the right knowledge. One of the key steps in navigating this complex path is understanding the language of home loans. Whether you're a first-time buyer or looking to refinance, mastering the financial lingo associated with home loans is essential.

This post aims to demystify the jargon and provide you with a comprehensive list of home loan terms. By familiarising yourself with these terms, you'll not only boost your financial literacy but also gain the confidence to make informed decisions that align with your personal and financial goals. From Amortisation to Zoning Laws, we'll cover all the crucial terms, giving you the tools you need to understand the nuances of your home loan options. So, let's dive in and turn the complex world of home finance into clear, manageable knowledge.

A-C Terms

Amortisation

The process of spreading loan payments over time in instalments consisting of both principal and interest.

Approval in Principle

Also known as a pre-approval, is a lender's conditional agreement to loan a specified amount before the full loan approval process is completed. This is based on a preliminary review of the borrower's financial information.

Assumable Mortgage

A mortgage that allows a buyer to take over the seller’s loan under the same terms, rather than obtaining a new mortgage.

Balloon Payment

A large, lump-sum payment scheduled at the end of a series of considerably smaller periodic payments. Not overly common in mortgage agreements.

Biweekly Repayments

Mortgage repayment plan where payments are made every two weeks instead of monthly, potentially reducing the amount of interest paid over the life of the loan.

Borrowing Capacity

The amount of money a lender determines a borrower can afford to borrow, based on an assessment of income and expenses.

Break Costs

Charges that may apply if you pay off your fixed-rate loan early.

Bridging Loan

A temporary loan that covers the interval between buying a new property and selling an old one or securing a permanent loan.

Broker Commission

The payment received by a mortgage broker from a lender for introducing a borrower who secures a home loan. This commission can be structured in two main ways:

• Upfront Commission: A one-time payment calculated as a percentage of the loan amount. It is paid to the broker when the loan is settled.
• Trail Commission: An ongoing commission paid to the broker over the life of the loan, calculated as a percentage of the remaining balance of the mortgage and paid to the broker monthly.

Capital and Interest Loan

A type of loan where each repayment includes both principal and interest components.

Capital Gains Tax (CGT)

A tax on the profit realised on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realised on the sale.

Capitalisation of Interest

Adding unpaid interest to the principal balance of a loan, increasing the total amount owed.

Cash Rate

The Australia cash rate is the interest rate set by the [Reserve Bank of Australia (RBA)](https://www.rba.gov.au) to influence national borrowing and lending rates. It's used as a tool to manage economic stability and control inflation.

Cashback Offer

A promotional incentive where lenders offer to refund a portion of a borrower's home loan amount or fees to attract new customers.

Caveat Emptor

A Latin term meaning let the buyer beware. This principle applies to real estate transactions, placing the onus on the buyer to perform due diligence before making a purchase.

Comparison Rate

A rate that includes both the interest rate and most fees and charges related to the loan, intended to help consumers identify the true cost of a loan.

Learn more about Comparison Rates here!

Conditional Approval

An initial approval of a home loan, given when certain conditions are met.

Construction Loan

A short-term loan for financing the construction of a building or property development, typically drawn down in stages as construction progresses.

Conveyancer

A specialist lawyer who deals specifically with the legal aspects of buying and selling real property.

Conveyancing

The legal process of transferring property from one owner to another.

Credit Assessment

The process a lender uses to evaluate the creditworthiness of a potential borrower.

Credit Limit

The maximum amount of credit a financial institution extends to a client on a line of credit or credit card.

Credit Score

A numerical expression based on a level analysis of a person's credit files, representing the creditworthiness of an individual.

Cross Default

A provision in a loan or lease agreement that puts the borrower in default if they default on another obligation, even if the obligations are with different lenders.

Cross-Collateralisation

Using more than one property as security for a single loan.

D-F Terms

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Debt Consolidation

Combining multiple debts into a single loan, often with a lower interest rate.

Debt Service Coverage Ratio (DSCR)

A measurement of a property’s cash flow available to pay current debt obligations, important for commercial lenders in assessing the viability of funding a property.

Debt-to-Income Ratio

A measure used by lenders to assess a borrower’s ability to manage monthly payments and repay debts.

Deed

A legal document that represents the official ownership of property. It contains information about the property and its owners, and is used to transfer title from the seller to the buyer during the sale of the property.

Default

Failure to meet legal obligations of a loan, such as regular repayments.

Default Notice

A formal notice from a lender indicating that the borrower has not met their loan obligations and is in default.

Deposit Bond

A substitute for a cash deposit when purchasing a property, where a bond is used to guarantee the payment of the deposit.

Discharge Fee

A fee charged by lenders when a mortgage is fully repaid and the legal mortgage is removed from the property title.

Drawdown

The act of accessing funds from a loan after it has been approved and made available.

Early Repayment Penalty

A fee that might be charged if you repay a loan in full before the end of the fixed-term period.

Encumbrance

A claim against, limitation on, or liability against real estate that affects the title to the property.

Encumbrance Certificate

A certificate issued by relevant authorities indicating any encumbrances such as mortgages, charges, or restrictions on the property.

Equity

The value of a property minus the amount still owed on the mortgage.

Equity Loan

A type of loan where you can borrow against the equity you have built up in your home.

Equity Release

A financial product that allows you to access the equity in your home, typically aimed at older homeowners.

Escrow Account

An account where funds are held in trust while two or more parties complete a transaction. In home loans, it’s often used to accumulate funds for taxes and insurance.

Exit Fees

Fees charged by a lender when a loan is paid off before the term ends, typically applicable to older loans.

Financial Hardship

A situation where a borrower is unable to meet their loan repayments due to unexpected circumstances, leading to potential modifications in loan terms.

First Home Owner Grant (FHOG)

A government grant provided to first home buyers in Australia to help cover the cost of purchasing a first home.

Fixed Interest Period

The duration during which the interest rate on a loan remains the same.

Fixed Rate Mortgage

A home loan where the interest rate is fixed for a specific period, typically 1 to 5 years.

Fixed-Rate Lock in

An agreement with a lender that allows a borrower to secure a specific interest rate on a loan for a particular period before the loan is fully approved.

Fixture

An item of personal property that becomes real property when attached in a permanent manner to real estate.

Forbearance

An agreement between the lender and the borrower to delay foreclosure, usually involving a temporary reduction or suspension of payments.

Foreclosure

The legal process by which a lender takes possession of a property due to the borrower’s failure to make loan repayments.

Full Doc Loan

A traditional type of loan that requires full documentation of income, assets, and liabilities.

G-J Terms

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Gazumping

A situation where a seller accepts a verbal offer on the property from one potential buyer, but then accepts a higher offer from someone else.

Gearing Ratio

The ratio of a borrower’s debt relative to their equity or assets, often used in discussing investment strategies.

Green Loan

A loan product offered at a lower rate to finance energy-efficient home upgrades or constructions.

Guarantor

A person who agrees to repay the borrower's debt should the borrower default on a loan obligation.

Holding Deposit

A deposit made to a seller showing the buyer's good faith in a transaction. This is often used in real estate transactions to secure a property before the completion of the sale.

Home Equity

The part of the property that the owner actually owns, represented by the difference between the property’s value and the mortgage balance.

Home Loan Calculator

An online tool provided by banks and financial websites that helps prospective borrowers estimate their monthly mortgage repayments.

Home Loan Pre-Approval

An indication from a lender that they will loan a certain amount to a borrower based on certain conditions.

Honeymoon Rate

A discounted interest rate offered on a mortgage for an initial introductory period before reverting to a higher rate.

Interest Capitalisation

The addition of unpaid interest to the principal balance of a loan, increasing the total amount of interest to be paid over the life of the loan.

Interest in Advance

A loan payment structure where interest is paid at the beginning of the payment period. Often used for investment loans for tax purposes.

Interest Rate

The percentage charged on a mortgage that must be paid along with the principal.

Interest Rate Cap

A limit on how high the interest rate on a variable rate loan can rise.

Interest Rate Cut

A decrease in the interest rate set by lenders or by the central bank, often making loans cheaper.

Interest Rate Floor

A limit on how low the interest rate on a variable rate loan can fall.

Interest Rate Hike

An increase in the interest rate set by lenders or by the central bank, affecting loan repayments.

Interest-Only Loan

A loan where the borrower pays only the interest on the principal for a set period, after which they start paying both principal and interest.

Investment Property

A property purchased to generate rental income or to be sold for profit.

Joint Tenants

A form of co-ownership that gives each tenant equal ownership and rights in the property. Upon the death of one tenant, their interest automatically passes to the remaining joint tenants.

L-N Terms

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Lender’s Right to Recourse

The legal right of a lender to pursue financial assets other than the collateral if the borrower fails to fulfill the debt obligations.

Lenders Mortgage Insurance (LMI)

Also known as Mortgage Insurance, this is insurance paid by the borrower but protecting the lender against the borrower’s default, usually required for loans with an LVR over 80%.

Learn more about LMI here!

Lending Policy

A set of formal guidelines or rules established by a bank to govern its operations and procedures. These policies help ensure compliance with legal standards, manage risks, and provide consistent service to customers.

Line of Credit (LOC)

A flexible loan arrangement where the borrower can draw on funds up to a set limit at any time.

Loan Application Fee

Also known as a Loan Approval Fee, this is charged by a lender to process a new loan application. It is intended to cover administrative costs and credit checks.

Loan Modification

Any change to the original terms of a mortgage, often used to make loan payments more manageable for a borrower facing financial hardship.

Loan Portability

A feature that allows borrowers to retain their existing loan and terms when moving to a new property.

Loan Servicing

The administration aspect of a loan from the time the proceeds are dispersed until the loan is paid off.

Loan Term

The duration over which the loan must be repaid.

Loan to Value Ratio (LVR)

The proportion of money borrowed compared to the value of the property, expressed as a percentage.

Learn more about LVR here!

Loan-to-Cost Ratio

A term used in commercial real estate to express the ratio of a loan to the cost of the project financed.

Low Doc Loan

A loan that requires less documentation than a standard loan, often used by self-employed or freelance borrowers.

Maturity Date

The final payment date of a loan, at which point the principal and all remaining interest is due to be paid.

Mortgage Broker

A professional who helps potential borrowers find the best possible mortgage products for their needs, across different banks.

Mortgage Discharge

The legal process of removing the mortgage lender's interest from the property title once the loan is fully repaid.

Mortgage Originator

The initial lender or broker who works with the borrower to create the loan, which may then be sold to another entity.

Mortgage Registration Fee

A fee charged by the government to legally record the interest of the lender in the property being financed.

Mortgagee Sale

A property sale initiated by the mortgagee (the lender) due to a default by the mortgagor (the borrower).

Negative Amortisation

A situation in which the loan principal increases over time, even though payments are being made regularly. This happens when the payments are not covering the interest due.

Negative Gearing

An investment strategy where the income generated by the investment is less than the expenses associated with maintaining it, typically used in property investment to achieve tax benefits.

No Doc Loan

A type of loan that does not require the borrower to provide the usual documentation of income and assets.

Non-Conforming Loan

A loan that does not meet standard lending criteria, possibly due to the borrower's credit history or employment status.

Non-Recourse Loan

A loan where the lender is only entitled to repayment from the profits of the property used as collateral, not from other assets of the borrower.

Notary Public

A public officer who serves as an impartial witness in performing a variety of official fraud-deterrent acts related to the signing of important documents.

Novation

The process of replacing an existing obligation with a new one, potentially replacing an old lender with a new one under different terms.

O-Q Terms

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Off-Plan Purchase

Buying property before it is completed based on the plan, and often before construction has even started.

Offset Account

A bank account linked to a mortgage account. The balance of the offset account reduces the amount of interest calculated on the mortgage.

Offset Account (100%)

A type of offset account where 100% of the balance offsets the principal, reducing the interest calculated.

Overcapitalisation

Spending more money on a property than what it is likely to return in value.

Owner-Occupied Property

A property where the owner lives in the home as their primary residence.

Panel of Lenders

A group of lenders from which a mortgage broker can choose when seeking loan products for clients.

Portability

A feature of some home loans that allows you to transfer your existing loan from one property to another without refinancing.

Post-Settlement

The period after loan documents have been signed and the loan transaction has been completed.

Power of Sale

A clause commonly included in mortgage agreements that allows the lender to sell the property in order to pay off the loan balance if the borrower defaults.

Pre-Approval Process

The evaluation by a lender of a borrower’s creditworthiness for a specific loan amount prior to the borrower finding a property to purchase.

Prepayment

Paying off part or all of a loan before it is due.

Prepayment Privilege

A feature in a mortgage allowing the borrower to pay all or part of the mortgage ahead of schedule without incurring penalties.

Principal

The amount of money originally borrowed in a mortgage, excluding interest.

Principal and Interest (P&I)

Payments made on a mortgage that cover both the principal amount and interest charges.

Progress Payments

Payments made to contractors building a house as different stages of construction are completed, often used in conjunction with construction loans.

Property Agent

A real estate professional who assists in buying, selling, or managing real estate.

R-S Terms

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Rate Guarantee

Also known as Rate Lock, this is an assurance from a lender to a borrower that a certain interest rate will be maintained for a set period, usually during the loan application process.

Re-amortising

Adjusting the repayment schedule of a loan, which can affect the term and amount of monthly payments.

Redraw Facility

A feature that allows the borrower to withdraw extra repayments they have made on their mortgage.

Refinance

The process of replacing an existing mortgage with a new loan, typically to get a lower interest rate or different loan features.

Repayment Holiday

A feature offered by some loans allowing borrowers to temporarily pause or reduce repayments under certain conditions.

Repayment Moratorium

A temporary halt in loan repayments allowed under certain conditions, typically during times of financial hardship.

Repayment Schedule

A detailed plan of how a borrower will repay the loan, including the amount of payments and their frequency.

Repossession

The process by which a lender can take ownership of a property when the borrower fails to make loan repayments.

Reverse Mortgage

A loan for older homeowners that allows them to convert part of the equity in their homes into cash without having to sell the home or pay additional monthly bills.

Right of Rescission

The legal right to cancel or rescind a contract or loan agreement within a certain time period after signing.

Secured Loan

A loan that is backed by collateral, meaning the borrower pledges an asset like a house or car against the loan.

Seller Financing

A real estate agreement where the seller provides the mortgage to the buyer, which is a less common alternative to traditional bank financing.

Serviceability

The assessment of a borrower's ability to meet loan repayments, based on income, expenses, other obligations, and future changes in circumstances.

Settlement

The process where ownership of a property is legally transferred from the seller to the buyer and the balance of the sale price is paid to the seller.

Settlement Risk

The risk that a loan will not close as expected, either because the buyer fails to secure financing or other issues arise that prevent the sale from completing.

Shared Equity Agreement

An agreement in which a homebuyer shares a portion of the appreciation or depreciation in the home’s value with another investor or entity.

Split Loan

A mortgage split into parts, allowing the borrower to manage some of the loan at a fixed interest rate and some at a variable rate.

Stamp Duty

A tax imposed by state governments in Australia on the purchase of a property.

Stamp Duty Concession

A reduction in the tax paid by certain types of buyers, such as first-time homebuyers.

Strata Title

A form of title used in Australia for multi-level apartment blocks and horizontal subdivisions with shared areas. The title gives ownership of a small piece of a larger property.

Sub-Prime Lending

Lending to individuals who have poor credit histories and are considered high risk.

Switching Fee

A fee for changing from one loan type to another with the same lender.

T-Z Terms

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Tenure

The period during which the borrower can live in the mortgaged property under a reverse mortgage.

Title Insurance

Insurance that protects real estate owners and lenders against any property loss or damage they might experience because of liens, encumbrances or defects in the title to the property.

Title Search

An examination of public records to confirm a property's legal ownership and find out what claims or liens are on the property.

Top-Up Loan

An additional loan amount added to an existing loan, usually used to borrow additional funds against the property.

Torrens Title

A system of land registration, also known as title by registration, where the government maintains a register of land holdings, which guarantees an indefeasible title to those included in the register.

Trustee

A person or firm that holds or administers property or assets for the benefit of a third party.

Undercapitalisation

A situation where a company or a property investment does not have sufficient capital to conduct normal business operations or manage the property effectively.

Underwriting

The process by which a lender reviews an application and decides whether to make a loan and under what terms.

Unencumbered Property

A property free from mortgage or any other debts attached to it.

Valuation

An assessment of a property's value, conducted by a professional appraiser, used by the lender to determine the amount of the loan.

Valuation Fee

A fee charged by the lender to have the property valued as part of the mortgage approval process.

Variable Rate Loan

A home loan where the interest rate can fluctuate based on changes in market interest rates.

Vendor Take-Back Mortgage

A situation where the seller of a property provides financing to the buyer, which can be part of the purchase price.

Waiver

An agreement by the lender to forego a right or claim in the loan contract.

Zoning Laws

Regulations established by local governments regarding how certain areas of land can be used, or how high a building can be.

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