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Loan jargon

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Loan & property jargon

Approval in principle: an indication from a lender that you meet their requirements for a loan. Some approvals in principle issued are virtually worthless as the documentation required to assess a loan is not verified. If you need to bid at auction, this type of approval is not generally sufficient.

Approved subject to / conditional approval: a loan that has been assessed and approved by a lender, “subject to” the lender confirming some additional information or being provided with some additional documentation.

Approval: see formal approval

Auction: the method of selling a property by public sale where the property is sold to highest bidder, provided the vendor has achieved their “reserve price”. There is no cooling off period or subject to clause in an auction contract for sale, so the highest bidder exchanges contracts on the day.

Caveat: an instrument lodged on the title of a property to warn other parties, including prospective buyers and lenders, that a third party has an interest in the equity of the property.

Cooling off period:  once the contract for sale has been exchanged, a period of time is given to purchasers in some states to allow them to pull out of the sale. Normally a penalty of 0.25% of the purchase price applies if the purchaser pulls out of the contract in this time.

DA: a development application made to a local council.

Exchange of contracts: once a purchaser and vendor have agreed to terms as per the contract of sale, they will both sign a copy and hand it to each other (usually your conveyancer or solicitor will do this for you).

Fixed rate loan: a fixed rate loan is one where the interest rate is set for a period of time (usually between 1 and 5 years).

Formal approval: when a loan is formally approved, all conditions of approval have been met, and the lender in question has committed to providing the loan. This means the same as unconditional approval or approval.

Guarantee: a promise made as bound by the terms of a contract.

Guarantor: a party who agrees to be responsible for all or a part of a borrower’s debt in the case that a borrower cannot meet their obligations under the loan contract.

Gazumping:  is the name given to the process whereby a purchaser has their offer accepted by the vendor, only to have another purchaser offer more and then secure the property. While this can be frustrating and expensive for the purchaser who misses out, it is not until contracts have been exchanged that the property is legally sold. This is most common where there is no “subject to” clauses or cooling off periods in the contract for sale. This also happens mainly in “hot” markets.

Joint tenants: equal holding of property between two or more persons. If one party dies, their share passes to the survivors. Different to tenants in common, where if one party dies their ownership is transferred based on the deceased’s will.

Lender mortgage insurance (LMI): insures the lender against loss for any shortfall of funds on the sale of a property (usually a mortgagee sale). The mortgage insurer will then pursue the borrower for the shortfall. LMI premiums are usually paid by the borrower for loans where the LVR is over 80% for full document loans, or over 60% LVR for low-loc loans.

Line of credit: a loan type where the loan has a limit which can be drawn up to at any time, can be paid down to zero at any time, and has no set term. Similar to an overdraft.

Loan to value ratio (LVR):  a loan amount divided by a property value expressed as a percentage.

Loan limit: for a line of credit style loan, this will be set when the loan is established. For a principle and interest loan, or term loan, the loan limit is the amount that would be owed if the borrower had only ever made the minimum repayments and no lump sum deposits into the loan. For loans that allow redraw, the difference between the current loan balance and the current loan limit is equal to the redraw available.

Lo doc / Low doc: short for low documentation loan, meaning that less paper work and verification of income is required by the lender.

Mortgage: a legal instrument lodged against a title of a property that secures a loan.

Mortgagee:  the registered mortgage provider (usually the lender).

Mortgagor: the owner of the property which has a mortgage over it (usually the same as the borrowers but can also include guarantors).

Mortgage insurance: see lenders mortgage insurance.

Mortgage protection insurance: not to be confused with mortgage insurance, this covers borrower’s loan repayments in the event they are not able to meet them through illness or redundancy.

Off the plan: is the purchase of a property before it has been completed.

Offset account: a savings account linked to your loan account. Funds in an offset account reduce your effective loan balance when a lender calculates the daily interest on your loan.

Old System Title: consists of a "chain' of title documents stretching back to the original owner rather than a Torrens title which shows just the current owners and any encumbrances.

Ombudsman:  the Australian Banking Industry Ombudsman (ABIO) provides an avenue through which customers can make complaints about their bank and have them dealt with independently.

Option to buy: a legally binding document which gives a party, for a fee, the right but not the obligation to buy something at a specific price within a certain timeframe. Used by developers to secure development sites while they source DA and finance approvals.

Private treaty sale:  the method of selling a property where the sale price is negotiated between the seller and buyers (usually through a real estate agent).

Redraw:  if funds have been paid into a loan in excess of the minimum required / scheduled repayments, some loans allow the borrowers to draw on theses extra repayments at a later date.

Redraw facility: a type of loan - interchangeable with “line of credit”.   

Reserve price: the minimum price a property vendor will accept at an auction.

Security: collateral for a loan, this is usually a mortgage over a property.

Settlement: for a purchase, this is when the balance of monies changes hand and the property becomes legally the purchaser’s. For a refinance, this is when the new lender pays out the old lender and becomes the mortgagee.

Strata title: is a Torrens title system first introduced into Australia in 1961 for handling the legal ownership of a 'portion' of a building, structure or development.  Typically units and most town houses are strata titled, with the owners having a separate title for each unit or town house, while jointly owning common areas such driveways through a body corporate.

Tenants in common: a property can be owned “tenants in common” in equal or unequal shares by two or more persons. If one party dies, the property is divided according to law (e.g. probate). Different to joint tenants in that if one party dies their ownership passes straight to the surviving owners.

Title: the legal ownership of real property, which stands against the right of anyone else to claim the property. In real property title is evidenced by a deed document.

Torrens title: the standard title type for free standing dwellings.

Transfer document:  the document registered with the Land Titles Office that confirms the change of ownership as noted on the Certificate of Title. Required by lenders prior to settlement.

Transfer duty: duty paid when a property’s ownership is transferred, means the same as stamp duty.

Unencumbered: most commonly refers to a property that has no mortgage against it. Broadly refers to having no restrictions on the title.

Vendor(s): the seller(s) of a property

Valuation: a report as required by a lender detailing the professional opinion of a properties market value.

Variable interest rate: an interest rate that can vary both up and down over the course of a loan. 90% of Australian home loans are variable rate loans.

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Lex Luther Enterprises Pty Ltd (ABN 58114636949) trading as “Mortgage Experts” is an Authorised Credit Representative (444479) of Martin Warren Thomas McDonald, Australian Credit Licence (391230) under s64(1) of the National Consumer Protection Act 2009.