Part 9 – Property Investment Glossary

We understand that investment and mortgage terms can often be confusing. The glossary below gives examples of the terms you may encounter. Definitions and terms may be interpreted differently to those included below.

AAPR: Also referred to as a Comparison rate, the Average Annualised Percentage Rate reflects the total cost of your loan by taking into account other costs other than the advertised interest rate. This is then expressed as a total interest rate cost to you over an average loan term.

Acceptance: To agree to the terms and conditions of an offer contract.

Additional Repayment: Additional funds paid off your loan which exceed the minimum monthly repayments.

Amortisation: To pay off principal and interest under a loan over a period of time.

Application fee: A fee paid by a borrower to cover the costs of establishing a loan.

Arrears: Overdue payments which are due to be paid.

Assets: Items of value which you own. Eg Property, Cash, Furniture & Fittings etc.

Balance Sheet: A financial statement confirming assets, liabilities and capital.

Balloon Payment: A final payment finalising a debt in which the amount paid is substantially more than previous instalments.

Borrower: An entity or person/s borrowing money.

Breach of Contract: To break the conditions of a contract which have previously been agreed to.

Break costs: A cost incurred for paying out a loan balance on a fixed term loan before the term has expired.

Bridging Finance: A loan taken where the purchaser wishes to buy a new property before selling their existing property. The lender will take security over both properties until the initial property is sold.

Capital: The current value of your assets. Eg Property, Cash, vehicles etc.

Capital gain: The financial gain received when selling an asset for more than you initially purchased it for.

Capped loan: A loan where the interest rate is set so that it may reduce, but not exceed a certain level over an agreed period of time.

Cash Flow: In relation to company accounts, reported net income plus amounts charged off for depreciation, amortisation and extraordinary charges to reserves.

Certificate of Title: A document which details the ownership of land and the dimensions or other details of a property..

Commercial Property: Property intended for use or occupancy by retail and wholesale businesses (e.g. stores, office buildings, hotels and service establishments).

Comparison Rate: See, AAPR.

Consumer Credit Code: The Consumer Credit Code also known as the UCCC is parliamentary legislation which is designed to protect the rights of the consumer by ensuring all lenders adhere to the same rules of lending practice.

Conveyancing: A legal process to transfer ownership of property from the seller to the buyer.

Contract for Sale: A contract used in the transfer of property, which documents the conditions for the sale of the property.

COSL: The Credit Ombudsman Service Limited.

Credit Limit: maximum preset amount a borrower can use on a loan account.

Credit Reference or Credit Report: In order to approve a loan, a lender will require a credit report on the borrower to confirm previous loans applied for or credit difficulties recorded. Credit reports are prepared by authorised credit reporting agencies, such as the Credit Reference Association of Australia. The Lender obtains the borrower’s permission in writing to proceed with a credit report.

Creditor: A party who is owed money

CRS: The Comparison Rate schedule which must be made available by each lender to confirm the annual percentage rate and its corresponding Comparions Rate for loan products offered.

Daily Interest: Interest calculated on a daily basis.

Debt Service Ratio: Lenders calculate the Debt Service Ratio by taking into account a borrower’s expenses as a proportion of their income.

Debtor: A party who owes money to another.

Default: Failure to make a loan repayment by a specified date.

Deferred Establishment fee: A penalty which may be charged when a loan is repaid by the borrower in full.

Direct Debit: A deduction of funds from a customers bank, credit union or building society account.

Disbursements: Fees and charges which are usually imposed by the solicitor when establishing a loan.

Discharge Fee: A fee imposed by the lender to process the discharge of a loan when it is paid out.

Draw down: A draw down is the transfer of money from the lender to a borrower after the loan has settled.

Early Repayment Penalty: If a loan is repaid before the end of its term, lenders may charge an early repayment penalty.

Equity: The value which an owner has in an asset over and above the debt against it. Eg the difference between the value of a property and the amount still owed on the mortgage.

Facility: A term used to describe a loan account.

First Home Owners Grant: An incentive from the Federal Government giving $7000.00 to first home buyers as a one off payment.

Fixed Rate: An interest rate set for an agreed term. Eg. for 2, 3, or 5 years.

Gazumping: Occurs when a vendor agrees to sell a property, but then sells it to another party offering a higher price.

Gearing: Also known as ‘leverage’, gearing is a measure of the debt against the equity (ownership) you have in a property.

Guarantor: A person giving a guarantee who agrees to pay another person/s debt if they default on their loan payments.

Government Fees: All home loans and purchase of residential property will attract certain government charges at the time of settlement. For example, stamp duty and mortgage duty.

Gross Income: Income before tax, superannuation or payroll deductions.

Honeymoon Rate: Some lenders offer a ‘discount’ or introductory rate for a short period of time. At the end of the ‘honeymoon’ period, the interest rate will usually revert to the lender’s standard variable rate.

Interest: A lenders charge for the use of funds or the return on deposited funds.

Interest-Only Loan: Under an interest-only loan, usually the borrower makes no principal repayments. The repayments are for the amount of interest only, which has accrued on the loan. These loans are usually for a short period of around 1 to 5 years.

Interest Rate: The rate at which interest is applied.

Land tax: An annual tax levied by state governments, the rate of which is determined by the assessed valuation.

Liabilities: A debt which one is liable for. Eg. Mortgages, personal loans, crdit cards etc.

Line of Credit Loan: This is a flexible loan that allows you to have funds transferred to your cheque account when required.

Loan: An advance of funds from a lender to a borrower on the agreement that the borrower pays interest on the loan, plus pay back the initial amount of the loan at or over an agreed time.

Loan Agreement: The contract between the lender and the borrower which sets out the conditions that apply to the loan.

Loan to Value Ratio (LVR): This is the measure of the amount of the loan compared to the value of the property.

Lump Sum Payment: An additional payment made by the borrower to reduce the loan amount. These payments are in addition to regular installments.

Maturity: The date a debt or investment must be repaid.

Mortgage: A form of security for a loan over property given to the lender for the repayment of the loan.

Mortgage Guarantee Insurance: An Insurance protecting the lender against loss in the event that the borrower defaults on the repayments or other covenants of the mortgage. The borrower will remain liable for their default.

Mortgage Manager: A company responsible for the day-to-day management of loan.

Mortgagee: The lender of the funds.

Mortgagor: The person borrowing money in the terms of the mortgage.

Net Income: The income received by an individual after tax has been taken out.

Net Profit: The profit remaining in a business after all expenses have been taken out, but before tax.

Notice of termination: Notice given either by a landlord or tenant that they want to end the rental agreement and vacate the property in compliance with the terms and conditions of the lease.

Outgoings: The expenses incurred in generating income – typically rates, insurance, repairs and maintenance and management fees.

Owner Occupied: Property that is lived in by its owners.

PAYE: Abbreviation for Pay-As-You-Earn, a taxation procedure for wage and salary earners under which income tax is deducted in installments from periodic pay.

Principal: The capital sum borrowed on which interest is paid during the term of the loan.

Principal & Interest Loan: A loan where you repay a portion of the principal and the interest over the term of the loan by regular installments.

Redraw Facility: If you have made any lump sum and additional principal repayments to your loan account, you can access those extra repayments whilst on a variable rate.

Refinancing: This means that you switch your current loan from one lender to another.

Regulated Loans: Loans which are considered for personal use and is governed by regulations of the Consumer Credit Code.

Rent review: A periodic review of rent under a lease using a predetermined method. It may be in line with the Consumer Price Index (CPI) or in accordance with a market valuation.

Residential Tenancies Tribunal: Specialist bodies that exist in most Australian States and Territories to resolve disputes between landlords and residential tenants.

Residential Tenancy Database: Used by real estate agents to identify tenants with a history of breaching tenancy rules.

Secured: To take guarantee over property for purposes of protecting a loan.

Security: An asset used to guarantee a loan.

Serviceability: Ability of borrower to make and meet repayments on a loan based on the borrowers expenses and income(s).

Settlement: Is the completion of the sale or purchase of a property. When the final payments are made at settlement, the lender will receive the signed transfer and the mortgage. The lender will hold the title deeds and the mortgage until the loan is repaid.

Settlement Date: A specific date at which buyer is to take possession of property upon finalising payment.

Signatory: A person authorised to access an account.

Stamp Duty: Stamp duty is a state government tax which is payable when a property is sold. Stamp duty is calculated on the purchase price of the property and is paid by the buyer. Each state and territory has a different rate of duty.

Standard Variable Rate: An interest rate, which is applied to a loan. These may have features such as redraw facility, construction, split loans options and mortgage offset.

Term: The length of a loan or a defined period within that loan.
Transfer: A document registered with the Land Titles Office noting the change of ownership.

Valuation: A professional opinion of the value of a property.

Variable Interest Rate: This is a fluctuating rate of interest charged by lenders. Variable interest rates change as official market interest rates rise and fall.

Vendor: The seller of a property.

Yield: The percentage return of a property calculated by dividing the net income by the opening market value or price.

If you’d like to talk to one of our experienced home loan consultants to assess what your investment home loan options are,