Lighthouse WordsLike most industries, the finance industry has its own language or jargon. We have provided a glossary of the most commonly used terms in the industry to help borrowers make sense of what they are told.
Access under Licence
An agreement given by the Vendor allowing the purchaser access to the property prior to Settlement.
Interest you have earned or incurred that is yet to be paid or charged.
The period of time one has to repay a loan at the arranged terms.
Annual Percentage Rate
The advertised rate of interest per annum.
An overdue account yet to be paid.
Money, property or goods owned.
Public sale of property with ownership going to the highest bidder, subject to a reserve price being reached.
A statement of assets, liabilities and net equity for an enterprise at a point in time.
A large than normal loan repayment to clear a debt, normally at the end of the loan term. Generally associated with car finance.
A cheque drawn by a bank from clear funds held by you.
Penalties, fees and adjustments charged when a loan (generally with a fixed interest rate) is repaid in part or full before the end of its term.
A short term loan that covers a financial gap between the purchase of a new property and the sale of an existing property.
The current value of your long term assets (eg home, investment property etc).
When Accrued Interest and/or fees are added to the loan rather than being paid when incurred.
An injunction preventing the registration of dealings (eg transfer, mortgage) on a property.
Certificate of Title
An official record of land ownership and any Encumbrances thereon. State land registries are moving to electronic certificates of title.
In a Strata scheme, any part of the property that is not included in a Lot. In an apartment building, this would normally include external walls, foyers and driveways etc.
A form of ownership of property by way of shares held in a private company which owns the entire property. It generally applies to apartments in older buildings that have not converted to Strata Title. Care must be taken as the maximum LVR is normally lower than Strata Title apartments and lenders will not accept this type of Security over a Duplex.
The interest and fees relating to a loan expressed as a single percentage figure.
A specific loan type for the purpose of funding the building of a new dwelling. The loan Draw Down is progressive as the builder submits invoices for work completed (ie progress payments), with loan repayments generally Interest Only until the final drawing.
Contract of Sale
A contract of sale lists all the relevant information pertaining to the sale and purchase of a property (eg vendor & purchasers names, price, settlement date etc). Each state has different requirements as to what must be included with the contract (eg Title Search, zoning certificates etc). If genuinely interested in a property, request a copy from the agent ASAP and forward to your legal and financial representatives to review/ peruse.
Guidelines and/or restrictions placed over a property (eg dwelling to be constructed of brick, no front fences allowed etc) registered on the Certificate of Title.
Temporary or interim insurance for property, motor vehicles etc prior to a formal policy being issued. If the Asset is Security for a loan, lenders generally require a Cover Note detailing their interests.
Failure to meet the due date for a loan repayment. Generally a higher Interest rate is charged until the loan is no longer in default.
An insurance product that guarantees payment of the full deposit at Settlement. They are used in lieu of a cash deposit, often for Off the Plan purchases.
Refer Mortgage Discharge Fee.
The payment of loan funds to you or as you or your legal representative directs.
A restriction on the use of part of the land for the benefit of another party (eg cannot build over a sewer main, overhead electricity wires etc).
An interest in a piece of the land (either financial or non-financial) registered on the Certificate of Title (eg a Mortgage, an Easement etc).
The difference between the value of Assets and Liabilities. If less than zero, this is referred to as negative equity.
The date at which a Contract of Sale becomes legally binding on the Vendor and purchaser. The purchaser is required to pay a deposit at Exchange.
An interest rate set for an agreed term (eg 3 years fixed).
The land owner owns the property outright in perpetuity.
When an offer has been made by a purchaser and accepted by a Vendor but Exchange of Contracts of Sale has not yet occurred, other purchasers can continue to make offers for the property. The real estate agent is legally obliged to submit all offers until Exchange occurs. The Vendor can decide to accept another offer until this time.
Borrowing money to invest in an Asset (eg to purchase an investment property, a share portfolio etc). If the income from the Asset exceeds the expenses associated with the Asset (eg loan interest, fees etc), the Asset is positively geared. Conversely if the income from the Asset is less than the associated expenses, the Asset is negatively geared.
A contingent liability where the Guarantor promises the lender they will pay the loan if the borrower fails to do so.
The person(s) or entity providing the Guarantee of another party’s debt.
In relation to a loan, the lender’s charge for the use of their funds.
Interest in Advance
Interest on an Interest Only, Fixed Interest rate investment loan is paid in advance for a set period (eg 12 months). Used to prepay interest and claim it as a deduction in the current financial year.
A loan where the borrower only pays interest on the amount borrowed for a set period (eg 5 years) before converting to Principal and Interest repayments for the remainder of the loan term. Often used where borrowers have both tax deductible and non-tax deductible loans, prioritising the repayment of non-tax deductible debt. Interest on these loans are higher than loans with Principal and Interest repayments.
Equal interest in the property between two or more owners. If one of the joint tenants dies, the property will automatically pass to the surviving joint tenant. This happens regardless of any contrary intentions in the will of the deceased.
An annual state tax payable by owners of land (except in the Northern Territory) based on the unimproved value of the land. Generally your own home is exempt and other exemptions and/or thresholds may apply.
With regards to property, it is a contract setting out the rights and obligations of the owner of a property (the landlord or lessor) and the person or entity who will occupy the premises (the tenant or lessee) for a set fee. In relation to asset finance, it is a commercial product which enables the lessee to have use of an Asset (eg a motor vehicle) for a set fee, while the lessor retains ownership of the Asset.
Land that is Leased to a person or company by the relevant State (as the Crown), normally for a specified term (eg a 99 year lease). All land in the ACT is Leasehold.
Lenders Mortgage Insurance (LMI)
Insurance a lender takes to protect itself against the risk of loss in the event a borrower Defaults on a loan and the sale of Security is insufficient to repay the debt in full. If a claim is paid, the residual debt remains payable to the insurer. Generally required where the borrower wishes to borrow more than 80% of the value of the security. The premium is a once off cost the borrower pays which can be added to the loan.
A liability is a debt or obligation that requires repayment, such as a home loan, car lease or credit card. A contingent liability is an obligation that becomes repayable based on an event occurring, such as a Guarantee.
Line of Credit (LOC)
A loan with an agreed credit limit but no set date for the balance to be repaid. Repayments are generally Interest Only but some LOC facilities allow Interest Capitalisation provided the balance remains within the agreed limit. Also known as a Home Equity loan.
Loan to Valuation Ratio (LVR)
The ratio of borrowing to the Valuation of the Security. Generally lenders have maximum LVR’s for different loans and/or Security.
The NCCP definition of a mortgage is in part any interest in, or power over, property securing obligations of a debtor or guarantor. The mortgage is generally registered on the Certificate of Title and the Encumbrance is not removed until the loan it secures is repaid. If the loan is in Default, the Mortgagee has the right to take possession and sell the property to recover its debt.
The lender of the funds advanced under the Mortgage.
The borrower of funds secured by the Mortgage.
Mortgage Offset Account
Refer Offset Account.
National Consumer Credit Protection Act (NCCP)
Replacing previous state based legislation, it governs the relationship between borrowers and lenders. It affords protection to consumers and provides standards of conduct for lenders.
Off the Plan
The purchase of a property, often an apartment that is yet to be built. Can be beneficial allowing time for a purchaser to save a larger deposit during construction. However care should be exercised given risks involved (ie failure of developer, valuation lower than purchase price etc).
A saving or transactional account linked to a loan account. With a 100% offset, debit Interest on the loan is calculated daily on the net debit balance (ie the loan balance less the savings balance). A partial offset provides a reduced interest rate on the net debit balance. Credit interest is not paid on the savings balance. Generally only linked to variable rate loans but some lenders do offer 100% or partial offsets for Fixed Interest loans.
Old System Title
A land title system in NSW prior to the creation of Torrens Title. Now uncommon as most Certificates of Title have been converted to Torrens Title. Care should be exercised to ensure clear title is obtained.
An Owners Corporation (also known as a Body Corporate) is an entity consisting of the owners of lots in a Strata Scheme. The role of the Owners Corporation is to manage the common property (eg finances, insurance, maintenance, etc).
Refers to Auction sales where bidding fails to reach the Reserve Price and the property is not sold. In some states the highest bidder has first right of refusal to negotiate with the Vendor after the Auction.
The person or entity to which a cheque is payable.
Property Exchange Australia (PEXA)
A national electronic property settlement exchange. Is replacing the physical settlement of property transactions.
Generally refers to home loans where the Security for the loan can be substituted. This feature allows a borrower to retain their existing loan and simply replace their existing property with a new property purchased.
The principal of a loan is the amount borrowed which Interest in calculated on.
Principal & Interest (P&I) Repayments
Repayments which firstly include Accrued Interest for a set period (eg a month) and an amount of Principal, so that the loan is repaid in full within an agreed term.
Private Treaty Sale
A property listed for sale with a set price which may be negotiable with the purchaser.
Usually applicable to variable rate loans, it allows a borrower to access any additional repayments made above the minimum required. Care should be taken when using a Redraw Facility on an investment loan, as funds redrawn may be deemed the creation of a new debt and may no longer be tax deductible depending on their use (eg funds redrawn from an investment loan used for a personal holiday).
The process of changing a loan (with an existing lender or to another institution). The purpose of refinancing can be to obtain a lower Interest rate, access Equity for other purposes, seek better terms and conditions or improved features and benefits.
A state government charge to register a dealing on a Certificate of Title (eg a Mortgage, Transfer etc).
Requisitions on Title
In NSW and Tasmania, Requisitions on Title are questions the purchaser is entitled to submit to the Vendor about the property to ascertain if they know anything which may adversely affect the title. In Victoria, Queensland and the Northern Territory, they have been replaced with warranties in the Contract of Sale. In WA and the ACT, the Contract of Sale excludes this right for purchasers and it is not common practice in SA to make formal Requisitions on Title.
Before the Auction (normally the day before or day of), the Vendor will set a minimum sale price with the auctioneer known as the Reserve Price. The Reserve Price is confidential between the Vendor, agent and auctioneer. The auctioneer is not required to announce the property is on the market once bidding surpasses the Reserve Price. If bidding does not reach the Reserve Price, the auctioneer will privately ask the Vendor if they will sell at a lower price. If not the property will be Passed In.
Right of Way
A Right of Way is a particular type of Easement for a third party to travel over another party’s land.
Rise and Fall Clause
A clause in a building contract providing for an adjustment of the contract price according to movement of prices of materials and labour. A Rise and Fall Clause in the building contract is a way in which the risk of fluctuating building costs can be shared with an owner rather than be borne solely by the builder.
Section 66W Certificate
In NSW, a certificate issued by the purchaser’s solicitor waiving the 5 business day cooling off period. Required if a Contract of Sale is to be Exchanged prior to Auction. In other states, buyers can also waive their cooling off period pursuant to their state’s legislation.
An Asset provided by a borrower to a lender as collateral for their loan until it is repaid. In the event of Default, the lender can sell the Asset and use the proceeds to repay the debt. Usually property is provided as Security but can also include cash, shares etc.
The date detailed on the Contact of Sale by which the purchase price less deposit paid plus or minus adjustments must be paid by the purchaser to the Vendor. Once Settlement occurs, the agent releases the keys to the purchaser who becomes the legal owner of the property.
Stamp Duty is a state based tax on certain transactions including the purchase of property. The rate of tax is based on the purchase price, differs from state to state and in some instances can differ depending on the use of the property (ie principal place of residence, rental property etc). Some exemptions and concessions apply (eg for first home buyers, pensioners etc) and conversely surcharges apply for foreign buyers.
Standard Variable Rate (SVR)
The benchmark interest rate for a lender’s standard home loan. Most lenders have home loan packages which amongst other things provide interest rate discounts off their SVR for an annual fee.
Strata Title is a form of ownership of a lot within a building (eg an apartment, townhouses, office etc). Ownership of a strata lot is the cubic airspace within the lot boundaries as detailed on the strata plan and owners are allowed the shared use of the Common Property.
A plan which depicts the physical boundaries of (and a building’s position within) a block of land. Some Contracts of Sale may include a Survey which was completed in the past. A new Survey may be desirable if it is suspected there are encroachments on (or by) the property, such as boundary fences, overhanging eaves etc.
Tenants in Common
Tenants in Common is where two or more individuals and/or entities share ownership of a property. Unlike Joint Tenants which have an equal interest in the whole property, Tenants in Common may hold their respective shares equally or unequally. The other major difference is upon the death of an owner, the deceased’s interest in the property is dealt with as per their will. Tenants in Common may be a preferable form of ownership between siblings or friends. It is also preferable form of ownership when more than one person wishes to be on title but for asset protection and/or taxation reasons, the majority ownership is held by one person (ie unequal shares).
The length of time agreed by the lender for the repayment of the debt. Normal home loan terms are 30 years, although lenders may require a shorter term (eg where the currency of the loan extends beyond the retirement age of the applicant).
Fees payable for the registration of dealings on title (eg Transfer, Mortgage, Caveat etc).
Official record of property ownership issued by each states land registry office, which also details any dealings on title (eg Mortgage, Caveat etc).
A method of recording and registering the ownership of land on a Certificate of Title. Other Encumbrances such as Mortgages, Easements etc are also recorded on title.
A document which details a change in ownership of a piece of land. The new ownership is registered on the Certificate of Title.
In relation to property, free of any Mortgages or Encumbrances.
A report (prepared by a registered valuer) which provides an estimate of the market value of a property.
The person or entity which owns the land listed for sale.
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