Mortgage Glossary

We've put together a list of the most common mortgage terms and jargon, you will come across when buying property.

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AIP (Approved in Principle)

Approved loan application made before a property is purchased.  Can be just a broad an indication of likely loan approval based purely on loan application information or can be a fully assessed loan application with supporting documents verified and approval granted subject only to the property being acceptable.

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Applicant

A person who formally applies for a loan.

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Application

Application - is the process of applying for a loan. Usually entails supplying a signed application form and supporting documents.

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Application form

A detailed document which is submitted to a lender when applying for a loan and includes information about the applicants personal, employment and credit histories as well as documents to support their income and asset / liability position.

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Arrears

A missed or late payments on credit facilities.

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Asset

An item of value which in a loan application commonly includes property, savings, shares, super, motor vehicles and general household contents

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Borrowing capacity

A calculation to determine the maximum amount that can be borrowed

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Bridging Loan

A short-term loan which allows a property owner to buy a property before selling an existing property.

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Cash out

Refers to increasing your existing borrowings with the loan proceeds controlled by the applicant.

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Co-Borrower

A person who applies for and shares liability of a loan with another borrower.

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Commission

In regard to Mortgage Brokers a fee paid by the lender to the broker for the successful introduction of a loan. These can be either an upfront and/or trailing commissions.

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Conditional approval

An approval with some conditions. Sometimes also called a pre-approval.

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Construction Loan

A loan specifically used for building a new property or doing renovations to an existing property. Loan funds are released in stages to the builder as the build progresses

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Conveyancing

The process of transferring a property from one owner to the next, can be done by a lawyer or licensed conveyancer

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Credit Check

A broker and lender will complete a credit check on each applicant. This check produces a credit score and contains information about existing and past repayments and types of loans and other liabilities the applicant has.

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Cross collateral

Where one or more loans are secured by more than one property.

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Debt

Something that is borrowed by one party from another. Usually money

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Deposit

The total of a borrower’s contribution to a property. Can also refer to the amount paid at exchange of contracts. 

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Discharge

The removal of a mortgage on the title of a property.

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DTI (Debt to Income Ratio)

Total debt divided by total annual gross income.

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Employment

A borrower's employment details are a major factor that a lender considers in their capacity to repay considerations.

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Expenses

Expenses are considered against income on all loan applications. Lenders will generally separate ‘essential/regular’ living expenses (ie. food, transport, utilities) and ‘non-essential’ expenses (ie. Private health insurance or private school fees) and assess them to their policies. 

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Equity

The difference between your property’s value and the loan amounts secured by the property.

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Finance

Is the terms of a mortgage, it means a lender has given loan approval or provided funds to a borrower. 

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Financial position

A summary of a borrower’s income, expenses, current assets and liability position.

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First homeowner

A person purchasing their first property.

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Fixed Rate

Is an interest rate on a loan that is locked in for a specific period, normally 1-5 years.

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Guarantor

Someone who provides a guarantee to a lender to assist someone else to secure a loan. Usually, a guarantor is a family member who pledges equity in a property as additional security for a first home buyer. Can also be a spousal guarantee for both security and income or if a trust or company borrower can be a director’s personal guarantee to assist the company or trust in their borrowing needs.

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HECS (Higher Education Contribution Scheme)

This is a loan scheme whereby a university student pays back their university course fees. Repayments are based on a progressively scaled percentage of annual earnings once a minimum earnings threshold is met.

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HEM (household expenditure measure)

A benchmark of living expenses used by lenders as a proxy for minimum household living expenses based on household make up and income levels.

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Interest only

Repayments based on just the interest charged on a loan rather than the principal and interest.  The loan balance does not reduce with interest only repayments. 

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Investment property

A property that has been purchased with the objective of earning a return on the investment, normally through rental income or through a profit with the resale of the property in the future

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Joint loan

It is loan you share with one or more people. Each borrower is jointly liable for a joint loan.

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Kit home

A home prebuilt off site and delivered in secretion ready to be assembled. Also, can be a home that can be assembled more quickly than a traditionally built home.

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Lender

Is a financial institution or bank that offers and funds home loans. They set the terms, interest rate, repayment plan and other key characteristics of a mortgage. They each have specific borrowing guidelines to prove your creditworthiness and capacity to repay a loan.

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Liability

It is money you owe to another person or institution. It can be short term like a personal loan or long term like a home loan.

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Line of Credit

Is a revolving credit facility that has no end term. 

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LMI – Lenders Mortgage Insurance

Is a type of insurance that protects the lender in case of a shortfall in the value of a property in a forced sale situation. It’s usually a one-off payment at settlement and applies for most loans with an LVR over 80%.

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LVR

Loan to Value Ratio is the loan amount represented as percentage of the value of the property. For e.g. a $500,000 loan on a property worth $1,000,000 is a 50% LVR.

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Mortgage

Refers to the legal instrument that can be noted on the title of a property. A mortgage secures a loan and gives the mortgagee (the lender) the right take possession of a property if their loan is in default.

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Mortgagor

An owner of a property that has granted a lender a mortgage over their property. All mortgagors must buy a party to any loan secured by their property. 

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Mortgage Broker

A liaison who deals with banks or other lenders to arrange a home loan on your behalf. They must act in your best interests when recommending a loan for you. 

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NMS (Net Monthly Surplus)

Is your net income minus your total monthly living expenses. It is then divided by your current debt and the monthly payment amount of the home loan you want to apply for. Each lender has their own criteria for the NMS, but they are usually similar. This determines overall the amount you have of additional spending per month.

 

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Non-Applicant

A person that is included in the loan application but isn’t requiring an interest in the propertya person that is included in the loan application but isn’t requiring an interest in the property

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Non-conforming

Applications that go to non-conforming lenders are not standard and often have quirks that mainstream lenders won’t accept

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Non-structural renovations

Depending on the type of improvements being made to a property, lenders will often require a Construction Loan to be taken out. Borrowers can often avoid this by specifying when their proposal doesn’t affect the supporting structure of the dwelling



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Offset Account

Offset accounts help you save interest on your home loan. The balance in your offset will go against the amount you own on loan, so the interest you pay will be calculated on the reduced amount

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Owner Occupied

When a person/s own the property they live in

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Payslip

A payslip is a document that’s given to an employee with each pay. It shows their total income earned for a set period. This might be from a salary, hourly wages, or commission.

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PAYG

A non-self-employed applicant receiving a wage from an employer

 

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Pension income

A type of income that some lenders may accept to service a loan

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Pre-approval

An application type whereby a client’s serviceability and suitability for a loan is assessed before the client has a target property

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Principal and Interest

The principal of your home loan is the amount of money you borrow from your lender. The interest is the fee charged by the lender to you to borrow this money.

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Principal Place of Residence (PPoR)

Your owner-occupied home. This can be an important distinction for the tax office

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Product comparison

The process of comparing different lenders products to help you decide which one suits you and your financial situation most

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Proposed rental income

When purchasing an investment property, the rental income that asset will produce in the future can be used for servicing calculations

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Purchase

A type of lending transaction where a property new to the client is acquired

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Purpose

The reason for why the funds are being used ie o/o vs inv, personal vs business will determine many things including rate, eligibility etc

 

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Quote

Outlines to the best of the brokers knowledge all the relevant information about the loan and credit proposal they are is proposing. This includes a breakdown of the loan details as well as disclosures regarding commissions. All borrowers are required to sign before we can submit your application to the lender.

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Redraw

Where you can make extra payments overtime but then access the funds by taking back out again if needed

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Refinance

 Is the process of taking out a new loan to pay off an existing one. It can be because of a change in your individual or financial situation, or maybe because you want a better deal on your home loan. When you refinance you can stay with your existing lender or swap to another one.

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Repayment type

Generally Principal & Interest or Interest Only.

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Renovations

Quite often people will seek equity releases (increases to their loan) to fund renovations / improvements of their property)

 

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Rental income

Income derived from investment properties. This will improve a client’s serviceability and DTI

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Requirements and objectives

A critical component of recent industry legislation. Brokers are required to discover this about every client before suggesting lending options

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Security

The property that you are putting up as a ‘warranty’ for the loan

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Seviceability

Is the capacity of a borrower to meet loan repayments. It is centred upon the loan amount, the borrower’s income, expenses and other liabilities. This creates an overall figure, known as the debt service ratio – a borrower’s monthly debt expenses as a percentage of monthly income.

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Settlement

Is the formal process performed by the legal and financial agents of both buyer and the seller. It varies from state to state but can take anywhere between 30 and 90 days. Sometimes the length is determined by how long the bank takes to sign off on your mortgage.

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Settlement agent

A person who acts to facilitate settlement between lender and client

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Split loan

When you divide your home loan into 2 or more parts. This way you can fix an amount of the loan for a certain period without any changes for extra security and another part can be a variable loan which may change over time.

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Spousal support

A type of mandated payment when a person is required to financially support an ex partner

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Stamp Duty

When you buy a home, you’ll need to pay tax which is charged by each state and territory governments what’s known as stamp duty. Essentially this payment transfers the ownership of a property to someone else. It applies to the buyer, not the seller.

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Standard Variable Rate

A rate that will go up and down overtime, which means your repayments may change

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Submission

Is when a broker submits all your personal and financial information to lender with supporting documentation. From this stage they will track it from Conditional to Unconditional to final settlement.

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Tax

A portion of income paid to the government.

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Tax return

May be used along with a NOA (Notice of Assessment) to annualise your income if you are self employed

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Top Up

A home loan top up or increase lets you borrow against the equity you may have built in your current property. You can then use the borrowed money to fund another goal like a pool, renovations or investing.

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Trust

Investment vehicle ie family trust, unit trust. Changes the way taxes are paid. Lenders can accept loan applications when the Trust is the borrower

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Unconditional approval

It means that a lender has taken the time to formally review all your paperwork with your signed loan application and decided to offer you a home loan based on the property you have chosen to buy.

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Valuation

It is a comprehensive inspection of your property that can be used to value the security for your mortgage. It's basically a risk alleviation technique lenders take, so that should there be a forced sale of your property, your house's market value could cover the outstanding home loan.

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Variable interest rate

A rate that will go up and down overtime, which means your repayments may change

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Yield

Yield is the annual net profit that an investor earns on an investment property

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