Loan Terminology Made Easy

FINANCE TERMINOLOGY

Beginning in a new industry can be daunting and a lot of new terminology and acronyms will be encountered. As understanding of finance terminology develops, so too will a greater understanding of the industry which will lead to increased confidence when dealing with clients and the varying circumstances that they will present. As the focus of loan writing involves property, it is necessary not only to grasp finance terminology but also have an understanding of real estate terminology. A glossary of terms, with some extracted from the Australian Finance Enterprise website (www.afin.com.au) and common acronyms, has been provided below.

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AAPR	Also known as the mortgage comparison rate or true rate. Used to compare the actual rate of a loan, taking into account the nominal interest rate per annum, the compounding frequency and upfront and ongoing fees, as outlined in the Consumer Credit Code.
ABA	Australian Bankers’ Association
ABIO	See BFSO
Acceptance	To agree to the terms of an offer or contract.
Access	The ways in which funds are able to be accessed e.g. ATM, EFTPOS, etc.
Accrued Interest	Interest that is earned or incurred that is yet to be paid or charged.
Additional Repayments	Extra funds paid into the loan over and above the minimum prescribed repayments.
Adjustments	The process of allocating expenses (council, electricity, phone, water rates) on settlement day that the seller has paid for but not used, and which the buyer has not used but will be billed for.
Affordability	Housing affordability is measured by an index known as the Housing Affordability Index, which is the ratio of average household disposable income to the income required to meet payments of a typical dwelling. The higher the number, the more affordable property is.
Agent	Person or body authorised to act on behalf of a client in the sale, purchase or management of property
Agreement	A legal contract documenting the terms and conditions of a loan, lease or hire purchase agreement.
All-in-one loan	A loan, generally variable, that allows the deposit of all income into the loan account and then the ability to withdraw money from the loan account for day-to-day purchases and transactions. The longer spare funds stay in the account, the greater the interest savings.
Allotment	A block of land created out of a larger area.
Amortising Loan	Borrowers with an amortizing loan have to make set repayments each month of both principal and interest so that over a certain period of time their loan is paid out. This is sometimes referred to as P&I. Other options are interest only or interest capitalisation. The opposite of an amortizing product is a revolving line of credit.
Amortisation Period	The period of time one has to repay a loan at the arranged terms.
Application Fees	Fees charged to cover or partially cover the lender’s internal costs of setting up a loan approval for a home buyer.
Appraised Value	Estimate of the value of a property being used as security for a loan.
Annual Percentage Rate	APR – the advertised rate of interest per annum.
Arrears	An account which is overdue and yet to be paid.
At Call	An account from which money can be withdrawn immediately.
ASIC	Australian Securities and Investment Commission
ATM	Automatic Teller Machine
Auction	Public sale of property with ownership going to the highest bidder, subject to a reserve price being reached.

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BAD	Bank Account Debits tax – State or Territory government tax on withdrawals from accounts on which a cheque may be drawn.
Bad Debt	A debt with little chance of being recovered and written off as a loss.
Balance Sheet	A depiction of the financial position of a business. Sets out the relationship between assets, liabilities and shareholders’ equity. A statement of assets, liabilities and net equity for an enterprise at a point of time.
Bank Cheque	A cheque that draws money specifically from funds held in a bank.
Bankruptcy	When a debtor has his/her estate placed into the hands of a receiver who has the responsibility for its distribution.
Basic Variable	A variable home loan at a reduced rate but generally with fewer features than a standard variable.
Bearer	A person presenting a cheque to a bank.
BFSO	Banking and Financial Services Ombudsman (previously known as The Australian Banking Industry Ombudsman (ABIO)) provides a dispute resolution service dealing with disputes that individuals and small business have with their financial service providers
Bill of Sale	A written agreement whereby ownership is transferred but the original owner is allowed to retain possession.
Body Corporate	A corporation of the owners of units within a strata building. They form a self-elected council for the management of the building and common areas.
Break Costs	Penalties charged when a loan is paid off before the end of its term. Generally applies to fixed loans.
Bridging Finance	A short-term loan that covers a financial gap between the purchase of a new property and the sale of an old property. .
Building Inspections	An inspection generally carried out prior to the purchase of a property to ensure the building is structurally sound.
Building Regulations	The standards formulated by local councils to control the quality of buildings.
Building Society Institutions	Operating in a similar fashion to banks, ie they take deposits and provide loans. Customers are ‘members’.

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Calculated	The frequency at which interest is determined. It is usually calculated on a daily, weekly or monthly basis.
Capital	The current value of long-term assets e.g. house, property, business, etc.
Capitalising Interest	When interest payable is accrued and added to the total debt payable rather than being paid as it is charged.
Capital Gain	The monetary gain obtained when an asset is sold for more than it was bought.
Capital Gains Tax	A Federal tax on the monetary gain made on the sale of an asset bought and sold after September 1985.
Capped Loan	A loan where the interest rate is not allowed to exceed a set level for a period of time, but unlike fixed rate loans, is allowed to drop.
Caveat	The Latin for ‘beware’. Usually it is in the form of a contract clause that stipulates a particular requirement.
Caveat Emptor	Latin for ‘let the buyer beware’, or in English ‘you pay your money and you takes your chances’….
Certificate of Title	This document details the land dimensions and ownership details and whether there are any encumbrances on it.
Charged	The frequency at which interest is added to the loan balance. This can differ from the frequency at which it is calculated. On many loans, interest is calculated daily but charged monthly.
Chattels	Chattels are personal property. There are two types: Real chattels can be buildings and fixtures. Personal chattels can be clothes and furniture.
CMA	Comparative Market Analysis – Real estate agents and auctioneers are required to substantiate any property’s price quotation they provide with a ‘comparative market analysis’ – comparing like sales, of at least three properties of similar standard or condition, sold within a five kilometre radius in the last six months. If a CMA cannot be given, the agent must provide a written substantiation of the market advice or opinion given to a client.
Collared Rate	A variable rate loan with a set upper and lower limit beyond which the interest rate cannot move past.
Combination Loans	Where various loans come under the same banner to form one loan. May have a portion variable, fixed or even a portion as a line of credit. Also known as split loans.
Commission	A fee payable to the real estate agent, by the vendor, for the sale of property.
Common Property	An area used by many, not an individual. Owned by the tenants in common. Apartments are not individually owned. Owners instead have a stake in the company as a whole.
Company Title	A property title that applies when owners of units in a block form a company.
Comparison Rate	Also known as ‘true rate. ‘ Used to compare the actual rate of a loan, taking into account nominal interest rate per annum, the compounding frequency and upfront and ongoing fees, as outlined in the Consumer Credit Code.
Compound Interest	Interest that is paid on both the accumulated interest as well as on the original principal.
Construction Loans	A loan specifically granted for the purpose of funding the building of a new dwelling. Money is generally able to be drawn as required, so payments can be made as necessary.
Consumer Credit Code	An Act of Parliament governing the relationship between borrowers and lenders.
Contract of Sale	A written agreement outlining the terms and conditions for the purchase or sale of property.
Contract	Legally enforceable agreement between individuals or entities. In real estate, contracts are exchanged when the deposit is paid.
Conveyancing	The legal process for the transferral of ownership of real estate.
COSL	Credit Ombudsman Service Limited (previously the Mortgage Industry Ombudsman Service Limited). COSL is a free (to the client) and independent Dispute Resolution scheme.
Countersigned	Additional signature or signatures to guarantee the validity of a document.
Covenant	Terms and conditions that specify the usage of a block of land or the buildings on it.
Cover Note	A note of temporary property insurance before the implementation of a formal policy.
CRAA	Credit Reference Association of Australia – the body which holds credit details on all of us!
Credit	Borrowed money to be paid back under an arrangement with a lender. Also, a sum of money paid into an account. Credit Limit The maximum overdraft a borrower may have on an account e.g. a credit card account.
Credit Rating	Based on a detailed analysis by a credit bureau, a ranking is issued taking into account a person’s financial history and how debt obligations have been met. The highest ranking is often called AAA and the lowest is D. Lenders take this information into account when assessing a loan application.
Credit Union	A co-operative, which is owned and controlled by the people who use its services, which are similar to that of a bank.
Creditor	A party to whom money is owed. Crossed Cheque A cheque with two parallel vertical lines across it to specify that the cheque must be paid into an account and cannot be cashed.
C/T	Certificate of Title D Daily Interest Interest calculated on a daily basis.

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Daily Interest	Interest calculated on a daily basis.
Debit	An account entry to charge a withdrawal to a specified account.
Debtor	Someone who owes money to someone else.
Debt Service Ratio (DSR)	A calculated percentage based on the applicant’s maximum weekly, fortnightly or monthly wage which will support repayments over the term of the loan.
Deed	A legal document that states an agreement or obligation regarding a property.
Default	Failure to meet debt payment on a due date.
Default Rate	The rate a loan rolls/moves to automatically at the end of any fixed period.
Deferred Establishment Fee	Charged when a loan is paid out within a short period of taking it out, such as three years.
Deposit Bonds	Guarantees that the purchaser of a property will pay the full deposit by the due date. Institutions providing deposit bonds act as a guarantor that payment will be made. They are often used as surety when cash isn’t readily available at short notice.
Discharge Fee	See mortgage discharge fee.
Disposable Income	Any income left over after all known expenses have been met e.g. mortgage payments, bills, etc.
DM	Discharged Mortgage
Draw Down	To access available loan funds, especially referring to lines of credit where the limit is set and funds can be used as required.
DSR	Debt Service Ratio

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Early Termination Charges	Any fees and charges incurred by paying out a loan early.
Easement	A right to use a corridor or passage of land which is owned by another.
EFTPOS	Electronic Funds Transfer Point of Sale – this facility allows an ATM card to be used to make purchases and often withdraw cash.
Encumbrance	An outstanding liability or charge on a property.
End Loan	Pertains to bridging finance – it is the loan amount remaining after an existing home has been sold and the proceeds have been paid towards the bridging loan.
Endorse	To sign the back of a cheque to confirm or transfer its ownership to someone else.
Equity	The percentage or amount of an asset actually owned.
Equity Loan	A loan secured by the part of the value of an asset (usually a house) which is owned by the borrower.
Equity Mortgage	A loan secured by the part of the value of an asset (usually a house) which is owned by the borrower.
ERIC	Effective Rate of Interest plus Costs.
Establishment Fees	Lending body fees which may or may not be charged to set up a loan.
ETIA	Early Termination Interest Adjustments
Exchange of Contract	The legal point of time when the vendor and purchaser swap documentation and start enquiries with a view to settlement.
Exit Fees	See ‘break costs’.

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(Loan) Features	Any attributes of the loan e.g. redraw facility, combination loan facility, portability.
FHOG	First Home Owners Grant
FID	Financial Institutions Duty – state duty on the receipts of financial institutions
FOS	Financial Ombudsman Service. It is a free (to the client) EDR and independent Dispute Resolution scheme.
FTRA	Financial Transactions Reports Act
FIRB	Foreign Investment Review Board
Fittings	Items that can be removed from a property without causing damage to it.
Fixtures	These are items that would cause damage to a property if removed. Their removal must be stipulated in the contract of sale and any damage made good by the seller.
Freehold	The dwelling and the land on which it stands is owned by the owner until they choose to sell it.
Friendly Societies	Customers make contributions to a fund which will provide them with some future benefit, similar to a life fund. Many offer loans and deposit facilities.
Frozen Account	An account in which all transactions have been suspended.

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Garnishee	To legally divert a part or whole of someone’s money or property to someone else.
Gazumping	When an offer on a home has been accepted (but not yet paid) and another party comes in at a higher price and secures the sale.
Gearing	The ratio of money and borrowed funds in an investment. If a property is ‘highly geared’ then it has a high ratio of borrowed funds compared to ownership.
GiroPost/td>	A facility allowing banking transactions to be made through the post office.
GST	Goods and Services Tax, implemented in July 2000 at 10 percent.
Guarantee	A promise made as bound by the terms of a contract.
Guarantor	A party who agrees to be responsible for the payment of another party’s debts.

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Highest Bid	The top price offered by a bidder at auction. If the reserve price is not reached and the property is passed in, the highest bidder is given the first option to negotiate with the vendor.
Holding Deposit	A refundable deposit based on the goodwill of the buyer to go ahead with the purchase.
Hotline	Lender’s information line number, usually a 1800 (freecall) number or a 13 (local call) number. Often connects to a call centre intended to answer queries rapidly.
Housing Affordability Index	The ratio of average household disposable income to the income required to meet payments on a typical dwelling. The higher the number, the more affordable property is.

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ILR	Indicator Lending Rate – the base rate on which interest rates for variable rate overdrafts and term loans are set.
Inclusions	Items included with the property e.g. light fittings, fridge, etc.
Income Statement	A statement of income and expenditure for a period, usually a year. (Profit and Loss Statement)
Interest Charges	The amount paid over the original amount financed. Charged on a fixed annual percentage rate basis. The lending body’s charge for the use of funds or the return on deposited funds. See daily interest and monthly interest.
Interest Adjustment	When additional repayments are made on a fixed loan, an interest adjustment cost is sometimes charged to compensate the lender for loss of interest revenue.
Interest Only	Usually a short-term arrangement whereby payments are made on the interest only, not the principal.
Interest Only Loan	A loan where the principal is paid back at the end of the term and only interest is paid during the term. The loans are usually for a short term of one to five years.
Internal Rate of Return	A measure of the return on an investment (or loan) which takes into account the time value of money by showing the rate of interest at which the present value of future cash flows is equal to the cost of the investment or loan.
Internet Banking	When banking transactions such as transfers and payments.
Introductory Loan	A loan is offered at a reduced rate for an introductory period usually no longer than 15 months) to new borrowers.
Inventory	A list of items included with the property e.g. furniture, movable items, etc.
Investment Loan	A loan used for the purchase of an investment property.
Investment Property	A property purchased for the sole purpose of earning a return on the investment, either in the form of rent or capital gain.

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Joint Tenants /td>	Equal holding of property between two or more persons. If one party dies, their share passes to the survivor/s.

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Land Tax	A State Government tax charged to the owners of any investment property over a stipulated value, and to the owners of any-occupier properties valued above a higher threshold.
Land Transfer Fee	A State Government tax assessed on the selling price of a property, generally around $60.
Lease	A document granting a period of tenancy of a property under specific terms and conditions.
Lenders Mortgage Insurance (LMI)	Most often referred to as just LMI, this is insurance that protects the lender if the borrower defaults on the loan. It is typically required for loans where 80% or more of the property value is required.
Lien	The right to hold property as security against a debt or loan.
Line of Credit	A flexible loan arrangement with a specified ceiling to be used at a customer’s discretion.
Loan Comparison System	A computer program designed to compare the true cost of different loans.
Loan Maintenance Fee	A loan management fee charged over the life of the loan. Often referred to as an ongoing fee.
Loan Security Duty	See mortgage stamp duty.
ILoan to Valuation Ratio (LVR)	The ratio of the amount lent to the valuation of the security (usually the house).

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Maturity	The date a debt or investment must be paid in full.
Maximum Loan Amount	The maximum loan value which can be borrowed.
MBS	This type of security is the same as above (RMBS) except it can include Commercial Securities such commercial loans, car loans leases etc
Minimum Loan Amount	The minimum loan value which can be borrowed.
Mitigant	A positive factor in a loan proposal considered an offsetting factor against a possible risk.
Mortgage	A form of security for a loan usually taken over real estate. The lender, the mortgagee, has the right to take the real estate if the mortgagor fails to repay the loan.
Mortgagee	The lender of funds.
Mortgagor	The person borrowing money in the terms of a mortgage.
Mortgage Brokers	A person or organisation marketing numerous loans from a panel of lenders. They offer a service where they will select the best loan or loans for borrowers from this selection.
Mortgage Comparison Rate	Also known as the true rate. Used to compare the actual rate of a loan, taking into account the nominal interest rate per annum, the compounding frequency and upfront and ongoing fees, as outlined in the Consumer Credit Code.
Mortgage Discharge	A Mortgage Discharge Form is completed by the borrower when the loan has been repaid in full authorising the lender to release the property from their security. The Certificate of Title would be produced and its registration noted on the Title.
Mortgage Discharge Fee	An administration fee to cover the costs (e.g. documents) incurred in winding up a loan.
(Lenders’) Mortgage Insurance	A form of insurance taken out by the lender to cover themselves in the event that the borrower defaults on their loan and the sale of the property is unable to cover the outstanding amount. Mortgage insurance premiums are usually payable by the borrower when the amount borrowed is over 80 percent of the property value and sometimes at lower loan to valuation ratios.
Mortgage Offset Account	A savings account run in conjunction with a home loan. The interest ‘earned’ on the account is applied to the interest paid on the loan to reduce the interest payable on the mortgage. A 100 percent offset is where the interest rates earned and paid are the same. A partial offset account is where the interest rate earned on the offset account is only a portion of the rate paid on the home loan.
Mortgage Originator	Retail and more often wholesale lender who sources securitised funds in order to package them as loans.
Mortgage Protection Insurance	Not to be confused with mortgage insurance, this covers borrowers’ loan repayments in the event that they are not able to meet them through illness or redundancy, for example.
Mortgage Registration Fee	A State Government charge for the registration of a loan, usually around $100.
Mortgage Stamp Duty	A State Government tax assessed on the dollar value of a mortgage.
Mutual Societies	Institutions operating in a similar fashion to banks, ie they take deposits and provide loans. Customers are ‘members’ and have ownership in the institution. Building societies come under this banner.

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Negative Gearing	Where the return on an investment is insufficient to meet the interest costs of the loan used to fund the investment.
NSR	Net Service Ratio
NCCP	National Consumer and Credit Protection Act. www.asic.gov.au

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Off the Plan	The purchase of a property, often an apartment, before it has been completed i.e. after only having seen the plans, not the finished product.
Offer to Purchase	A legal agreement that details a specific price for the purchase of a specific property.
Offset Account	A savings account run in conjunction with a home loan. The interest ‘earned’ on the account is applied to the interest paid on the loan to reduce the interest payable on the mortgage. A 100 percent offset is where the interest rates earned and paid are the same. A partial offset account is where the interest rate earned on the offset account is only a portion of the rate paid on the home loan.
Old System Title	Common Law Title consists of a ‘chain’ of the title documents stretching back to the original owner.
Ongoing Fee	Any loan maintenance fee charged regularly over the life of a loan.
Option to Buy	A legally binding document which gives a person, for a fee, the right to buy something usually within a specific time frame at a specific price.
Overdraft	A pre-arranged limit to which a person can exceed an account balance.

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Passed In	A property is ‘passed in’ at auction if the highest bid fails to meet the reserve price set by the vendor.
Payee	The person or entity to which a cheque is payable.
Phone Banking	When banking transactions such as transfers, payments and deposits can be made over the phone, often by an automated phone system.
Plan	Detailed illustration of a house that shows the internal layout and dimensions and the position of the house on the land.
Portability	Where a new property may be substituted as security for an existing loan. /td>
Principal	The capital sum borrowed on which interest is paid.
Principal and Interest Loan	A loan in which both the principal and the interest are repaid during the term of the loan.
Private Treaty Sale	A property sale where the buyer negotiates on a price set by the seller.

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Rebate	A refund, ‘cash back’ or monetary incentive eg. the first home-buyers rebate or tax rebate.
Redraw Facility	A loan facility whereby additional repayments can be made on a loan and then these extra funds can be accessed when necessary. They will often have limitations such as a minimum redraw amount and a fee for each withdrawal.
Refinancing	To replace or extend an existing loan with funds from the same institution or another.
Rental Guarantee	A promise by the developer guaranteeing a certain level of return on an investment property. Usually stated as a percentage of the purchase price, it generally relates to investment properties purchased off the plan.
Repayment Maximum/Minimum	The maximum/minimum percentage of income which a lender will allow to be committed to the repayment of a loan.
Requisitions on Title	A process by which the buyer requests additional information about the title of the property from the seller.
Reserve Price	Specified minimum price acceptable to a seller at auction.
Residential Investment Loan	A loan granted to purchase a property intended for investment purposes (for example, to be rented out) as opposed to owner-occupied purposes.
Right of Way	Can be either somebody’s right to cross another property or a general pathway across the land.
Rise and Fall Clause	A building contract clause that allows the final pricing to move up or down according to the fluctuations of material prices or wages.
RM	Registered Mortgage
RMBS	This is a type of security whose cash flows come from residential debt such as mortgages, home-equity loans and sub-prime mortgages. This is a type of mortgage-backed security that focuses on residential instead of commercial debt. Holders of an RMBS (usually) receive interest and principal payments that come from the holders of the residential debt. The RMBS comprises a large amount of pooled residential mortgages.

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Search	An examination to confirm that a vendor is in a position to sell a property and that there are no encumbrances on it.
Securitisation	The process of taking a pool of diverse assets such as different home loans and converting them into a tradeable security such a bond which investors can then purchase and trade.
Security	Something given or deposited as surety for the payment of a debt, in the case of a loan, it is a mortgage over a vehicle. An asset that guarantees the lender their borrowings until the loan is repaid in full. Usually the property is offered to secure the loan.
Settlement Date	Date on which the new owner finalises payment and assumes possession.
Signatory	A person authorised to utilise an account.
Solicitors’ Mortgages	Mortgages offered through solicitors firms. Some firms will take an active part in managing the loan, while others merely set up the loan. Generally offered at higher rates than other lenders, these loans are normally short term.
Split Loan	See combination loan.
SD	Stamp Duty
Stamp Duty On Property Purchase	A State Government tax assessed on the selling price of the property.
Standard Variable	A variable home loan, usually with comprehensive features (as opposed to a basic variable). This is often the variable rate fixed rates roll to at the end of their fixed term.
Stepped	A stepped account is one in which different amounts of interest are paid on different portions of the account. eg. 2% on the first $1,000 and 3% on the second $1,000.
Strata Title	This title gives ownership of a ‘unit’ of a larger building which may be sold, leased or transferred. Also entitles membership of the body corporate.
Stratum Title	A title that records ownership of a ‘unit’ of a larger property. Unlike a Strata Title, the owner becomes a shareholder in the company that manages the common area, not just a member.
Survey	A plan that shows the boundaries of, and the building position within, a block of land.
Susceptibility Report	Shows likelihood of future pest infestations.

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Tenants In Common	The equal or unequal holding of property by two or more persons. If one party dies, the property is divided according to law.
Term	The length of a home loan or a specific portion within that loan.
Term Deposit	Often called a fixed interest account – a type of savings account where the size of the deposit, the interest rate and the length of time the money is deposited for, are all fixed.
Title Fees	Payable to the states’ Land Title Office or similar body for the title search, transfer of property ownership, registration of the new mortgage and discharge of the old one.
Title Search	Process to ensure that the vendor has the right to sell and transfer ownership.
Torrens Title	Records ownership of a piece of property. The owner is lawfully entitled to lease, sell or dispose of the property as desired. Also known as Certificate of Title.
Town House	Usually a two-storey dwelling registered under a strata title.
Transaction Fees	Charges for any transactions conducted i.e. withdrawals, transfers, deposits, etc.
Transfer	A document registered with the Land Titles Office that confirms the change of ownership as noted on the Certificate of Title.
True Rate	Also known as the mortgage Comparison Rate. Used to compare the actual rate of a loan, taking into account the nominal interest rate per annum, the compounding frequency and upfront and ongoing fees, as outlined in the Consumer Credit Code.

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Unencumbered	A property free of liabilities, encumbrances or restrictions.

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Valuation	A report as required by the lender, detailing a professional opinion of the property’s value.
Variable Interest Rate	A rate that varies in accordance with the rates in the marketplace.
Vendor	The party who offers a property for sale.
Vendor Statement	A statement by the seller to the buyer detailing material particulars regarding the property in question.
Villa	A style of housing, often an attached dwelling.

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Zoning	Local authority guidelines as to the permitted uses of land.