There's a whole lot of jargon in the world of home loans. So to help you understand some of the more complex terms here is a list of commonly used lending terms and their definitions.
If you pay more off your home loan than the minimum repayment required each week, fortnight or month, you are making additional repayments. The extra amount you pay will come off your loan balance and reduce the amount of interest you pay. Your loan documents will state what your minimum repayment amount is. Once you have made enough additional repayments your lender may reduce your minimum repayment. Variable rate loans allow additional repayments, however there are restrictions on paying extra amounts off a fixed rate home loan. When you have made additional repayments you may be able to withdraw/redraw them if you need or want to, depending on your specific loan.
AIP is the abbreviation for Approval in Principle.
Approval in Principle
Also known as conditional approval, it is issued by lenders based on a proposed scenario. This offers you the confidence of knowing how much you can spend before you go house hunting or make an offer on a property. An approval in principle is usually subject to a number of conditions set by the lender such as; a satisfactory property valuation once you have found a property.
If you have fallen into arrears it means you have missed some of your scheduled loan repayments. Your bank or non-bank lender will contact you to remind you that you have missed a payment. If you are struggling to make your repayments the best thing to do is talk to your lender about it. They may offer you a temporary repayment holiday or arrange a temporary payment plan you can afford while you are having difficulty.
You can ask your lender to make an arrangement to vary the terms of your agreement while you are having financial difficulty. You can also ask the lender for a hardship variation. For more info about hardship see the Australian Government Moneysmart website here.
This term only applies to Fixed Interest Rate Loans. If you have a fixed loan your loan agreement will specify whether you are able to make any additional repayments during the fixed term. If you go above the limit of additional repayments, or if you see the property and pay the loan off, you may be charged break costs. Break Costs are usually only charged if the interest rate your bank has advertised for the same loan term right now is lower than the rate you are paying.
Cash Back Home Loan
A home loan from a Cash Back Mortgage Broker where the trailing commission is refunded to the borrower each month. The trailing commission refund is usually at least 0.15%p.a. This is deposited directly into the bank account of the borrower each month. On a $500,000 home loan the cash back rebate is from $50 to $120 per month, depending on the lender the customer selects. For more info check out our page Cash Back Mortgage Broker FAQ or contact us.
The Cash Rate or Official Cash Rate is the interest rate set by the Reserve Bank of Australia on overnight loans in the money market. Changes in the cash rate influence the interest rates offered by banks and non-bank lenders. However, there is no legal requirement for lenders to change their rate when the Reserve cash rate changes.
Brokers receive their income from lenders in the form of payments known as commission. There are two types of commission, upfront commission and trailing commission. A Cashback Mortgage Broker refunds the trailing commission to their customers each month.
Some home loan brokers share their income, the commission payments that they receive from the lender, with their customers. Cash Back Mortgage Broking refunds the trailing commission to their customer each month. The trailing commission refund is usually at least 0.15%p.a. This is deposited directly into the bank account of the borrower each month. On a $500,000 home loan the cash back rebate is from $50 to $120 per month, depending on the lender the customer selects. For more info check out our page Cash Back Mortgage Broker FAQ.
This is when the security property for one loan is also used as the security property for another loan. The down side for you is that if you find yourself in financial difficulty the lender has a mortgage over both your properties. When you apply for loans, depending on the LVR involved, you can state that you do not want to cross collateralise them.
If you have not been making your mortgage repayments your loan is in arrears, if this continues your lender will issue you a default notice. The notice gives you approximately 30 days to bring your loan back into order. The best thing to do is talk to your lender as soon as possible, and explain why you have fallen behind. You can ask them to make an arrangement to vary the terms of your agreement while you are having financial difficulty. You can also ask the lender for a hardship variation. For more info about hardship see the Australian Government Moneysmart website here.
Your deposit is the amount of money you have to contribute to a property purchase. The minimum deposit required is 5% of the property value, plus costs. A deposit less than 20% usually results in Lenders Mortgage Insurance being payable, which is added onto the loan amount.
When you close a home loan, either when you sell a property or refinance a home loan, you will need to complete and sign a form called a Discharge Authority. This form notifies your current lender of your intention to close the loan, and gives them time to prepare for settlement.
Fixed Interest Rate
A fixed interest rate is a rate offered on a home loan for a set period of time, usually between 1 and 15 years. During the Fixed Term the interest rate, and hence your loan repayments, will not change. For a chart of the benefits and disadvantages check out our post Fixed vs Variable Interest Rates.
The Fixed term is the period of time a loan is locked into a fixed interest rate. When you apply for a fixed home loan you have the option of 1, 2, 3, 4, 5, 7, 10 or 15 year fixed term. If you make more repayments than are permitted under your fixed loan agreement, or if you sell the property and pay the loan off, a penalty known as Break Costs may apply.
If your loan fell into arrears, you received a default notice and did not take action within 30 days (such as paying the outstanding loan repayments, applying for hardship or making an agreement with them to sell the property and pay off the loan), the lender may commence action to take possession of your property and sell it to clear your debt. Checkout the Australian Government Moneysmart page on hardship here.
When you apply for your first home loan if your deposit is less than 20% you will be required to show that you have genuine savings. This means you need to show that over time the balance in your bank account has generally increased. You can be gifted the initial amount and have deposited it in your account then slowly added to it. The idea is to show the lender that you can put money aside from your income each week, and that you don’t spend everything you earn. A mortgage is a commitment for many years, the lender wants to ensure you can pay it back without difficulty.
A guarantor is a person or people who offers a property or money in a term deposit as security for your loan. It is often referred to as going guarantor. There is a risk for a guarantor because if you don’t pay your mortgage repayments they are liable and could lose the security they offered, that is their property or term deposit. The Australian Government Moneysmart website has a good guide for prospective guarantors here.
Most loans require principal and interest repayments however you can apply to only pay interest for a set period of time, for example 2 to 5 years. During the interest only period your repayments will be lower but your loan balance will not reduce as you are not paying anything towards the principal. After the interest only period the loan reverts to principal and interest payments.
Interest Only In Advance
In May and June before the end of the financial year, lenders advertise special interest rates for borrowers to pay Interest Only In Advance. Customer’s can then pay a full year of interest repayments for the following year, before the end of the current financial year, so they can claim it on their tax return.
The interest rates on variable home loans and investment loans are influenced by changes to the cash rate which is controlled by the Reserve Bank of Australia. However lenders are not required to change their interest rates when the Reserve Bank changes the official cash rate.
A lender may be a bank such as ANZ, or a non-bank entity such as Pepper Money, who you can apply to borrow money from.
Lenders Mortgage Insurance
Usually abbreviated to LMI, this is an insurance policy taken out by the lender to cover the risk of lending to customers who have less than a certain deposit. The general rule of thumb is that if you have an LVR higher than 80% LMI will be payable. The cost of the policy is paid for by the borrower and is usually added onto the loan amount. Lenders Mortgage Insurance does not protect the borrower, only the lender. It can be avoided by contributing a higher deposit or having a guarantor.
Lenders require applicants submit details of their regular living expenses with their loan application. They want to know what it costs to run your household. It is important not to underestimate what you spend thinking this will mean you can borrow more. Lenders cross reference the information you provide with the bank statements you provide.
See Lenders Mortgage Insurance
Loan to Value Ratio
The Loan to Value Ratio which is the amount of the loan divided by the value of the property. It is always expressed as a percentage. It is important because it determines which loans you are eligible to apply for and whether Lenders Mortgage Insurance is payable.
See Loan to Value Ratio
The mortgagee is the bank or non-bank lender who is providing the money for your loan.
The mortgagor is the person borrowing the money from the bank or non-bank lender.
A mortgage broker compares the loans available from multiple lenders and presents the best options to their customer to select from.
In Australia mortgage brokers must have a credit license and be accredited. They must follow strict guidelines including; assessing their customers needs, matching lenders to those needs, remaining impartial during lender selection (which means suggesting the best lenders for the customer not ones who pay higher commission) and acting in their customers best interests. Read about why you should use a mortgage broker here.
Mortgage Broker Fee
Most mortgage brokers do not charge their customers for their service. Instead the lender the customer selects pays the mortgage broker commission an upfront payment and a monthly payment known as trailing commission. Cashback mortgage brokers refund the trailing commission to the customer each month. Contact a cashback mortgage broker here, or more information on how mortgage brokers are paid can be found here.
Not all institutions who offer loans and mortgages are banks. There are several lenders who are known as non-bank lenders. This means they do not hold a banking licence. Non-bank lenders source the funds for home loans through the wholesale market rather than the deposits of their other customers. They must comply with the the rules and regulations set out by ASIC (the Australian Securities & Investments Commission).
A non-conforming lender is a lender who offers loans to customers who do not conform to standard lending policies. Such as, customers with a bad credit rating or who are self employed. Non-conforming lenders tend to be the smaller non-bank lenders who are more agile and able to review each customers scenario individually rather than applying blanket policies.
Official Cash Rate
See Cash Rate
An offset account is a transaction account which is linked to your home loan account. You do not earn any interest on the money in your transaction account, instead when the interest is calculated on your home loan the money in your offset account acts to reduce the balance of your home loan. If you have money in your offset account you therefore pay less interest on your home loan.
This is a loan feature which enables you to take your loan with you from one property to another without having to reapply for a new loan. It is possible to port a loan from one property to another even if there are different settlement dates. In that instance the lender places the proceeds from the settlement into a term deposit, which they take security over as an interim measure while you find a new property. There is usually a fee of a couple of hundred dollars to use loan portability with most lenders. Not all loans allow portability. If this is a feature you may need in future be sure to let your home loan broker about it upfront.
Principal and Interest
Most home loans are on a principal and interest basis, which means with each repayment you pay interest and a small amount of the principal. The small amount of principal is subtracted from your loan balance, and over time your loan balance gradually reduces until it is paid off over the term of your loan. When you make extra repayments in addition to your regular principal and interest repayment, they come straight off your loan balance.
Many lenders offer a package in which they bundle their products and services for a single annual fee. Once you have the package the lender usually no longer charges monthly or annual fees for your; credit card, transaction account or home loan and investment loans. Often there will be other benefits such as lower interest rates and discounts on other services offered by the lender such as home insurance. The disadvantage with a package is that they won't include the basic and therefore cheaper interest rate home loan products. Packages usually will include the lender's higher rate loans with all the bells and whistles.
Redraw allows you to withdraw any additional payments you have made off your home loan. Some loans and loan packages offer this feature for free. Other loans charge or place minimum redraw amount limits. Some loans do not allow redraw at all.
See Transfer Duty
Trailing commission is paid by lenders to home loan brokers each month on an ongoing basis. It is to ensure the broker continues to provide customer service to the borrower and to prevent the broker recommending the borrower refinances away to another lender. It is usually at least 0.15%p.a. of the loan balance. Cashback Mortgage Brokers do not keep this payment, they provide a trailing commission refund to their customers each month. Find out more on our Cashback Mortgage Broker FAQ page here.
Also known or formerly known as Stamp Duty in some states, Transfer Duty is a State Government charge payable by the buyer on the value of the property being purchased. The rules vary from state to state, but it is typically payable at settlement or within three months of the contract date, whichever comes first. First Home Buyers may be eligible for an exemption or partial exemption from paying Transfer Duty.
Upfront commission is the payment made by a lender to a home loan broker for introducing a customer to them. It is a once off payment paid upon the settlement of the loan.
When you apply for a home or investment loan, depending on the LVR the lender may want to carry out a property valuation. There are three types of valuations. A Desktop Valuation is carried out without visiting your property by comparing it with recent sales in the vicinity of your property. A Curbside or Drive-by Valuation is when a valuer drives past your property and look at it from the outside then drives past similar houses nearby that have recently sold. A Full Valuation is when the lender sends a Property Valuer to the property to inspect the house inside and out, then compare it to recent sales in the area.
Variable Interest Rate
A Variable Interest Rate increases and decreases when the lenders changes their interest rates. Lenders usually, though not always, change their variable interest rates when the Reserve Bank changes the official cash rate. For a chart of the benefits and disadvantages check out our post Fixed vs Variable Interest Rates.
Contact a Cash Back Mortgage Broker
Find out how you can get a Cash Back Home Loan with a Trailing Commission Refund each month for the life of the loan.