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 home loan application form is a document that individuals or borrowers need to complete and submit to a financial institution or lender when applying for a home loan or mortgage. It is a formal request and the information included will help the lender assess the borrower’s eligibility in making a lending decision.

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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

Borrowing capacity typically refers to the maximum amount of money that an individual, company, or entity can borrow from a lender, such as a bank or financial institution.

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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

Commission is paid by the lender to a mortgage broker for introduction of a new client with way of a home loan.

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Conditional approval

Conditional home loan approval (also known as pre-approval) means that a lender has made an initial evaluation and decided, in principle, to lend you money towards the purchase of your home.

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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 credit check, credit enquiry or credit review is a process where your broker or lender access a potential client’s credit report to evaluate their creditworthiness.

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Cross collateral

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

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Debt

Debt is a financial obligation or liability that arises when one party borrows money or receives goods, services, or assets on credit and is required to repay the amount borrowed, typically with interest, over a specified period of time.

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Deposit

A deposit is a sum of money payable as a first instalment on a property at the time the contracts are exchanged with the balance being paid at a later stage on settlement.

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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

Determining monthly living expenses is a crucial aspect of the home loan application as they help determine the borrower’s ability to afford the mortgage repayments along with their other financial obligations.

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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 financial position, often referred to as a financial statement or financial snapshot, provides an overview of an individual’s or an entity’s financial health at a specific point in time. It summarizes the assets, liabilities and the equity and the entity and helps stakeholders understand the financial wellbeing of the entity.

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First homeowner

A first homeowner is an individual or household who is buying 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. This allows the borrower to accurately predict their future payments. Variable rate loans, by contrast, are anchored to the prevailing discount rate.

It’s important to understand the period of your loan being fixed will expire after an agreed time of between one and five years. Once the fixed rate term ends, your mortgage will go back to being variable rate so the rate can fluctuate over the life of your loan.

 

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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. Tertiary education fees in Australia are payable for courses at tertiary education institutions. The Commonwealth government provides loans and subsidies to relieve the cost of tertiary education for some students. 

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HELP (Higher Education Loan Scheme)

The Higher Education Loan Scheme (HELP) is a financial assistance program for eligible students in Australia.

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HEM (household expenditure measure)

Each lender has their own ‘benchmark’ of what they will consider ‘living expenses’ to be, based on your income. This is known as HEM (Household Expenditure Measure). It is important for borrowers to provide accurate and comprehensive information about their living expenses as it can lead to problems down the track and may affect the lender’s decision.

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Interest only

Interest only payments are a type of loan repayment in which the borrower is only required to pay the interest that accrues on the principal balance for a certain period, typically set for 1 to 5 years. During this time, the borrower is not required to make any payments towards the principal amount borrowed.

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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 with the expectation that the borrowed money will be paid back, often with interest, over a specified period of time.

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Liability

A liability Is a financial obligation or debt that an individual or business owes to another party (ie. bank or other financial institution).

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Line of Credit

Is a revolving credit facility that has no end term. A line of credit (LOC) is an account that lets you borrow money when you need it, up to a preset borrowing limit, by writing checks or using a bank card to make purchases or cash withdrawals. Available from many banks and credit unions, lines of credit are sometimes advertised as bank lines or personal lines of credit.

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LMI – Lenders Mortgage Insurance

LMI or Lenders Mortgage Insurance is a type of insurance that protects the lender (usually a bank or financial institution) in the event that a borrower defaults on their mortgage loan.

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LVR (Loan to value ratio)

LVR stands for 'Loan to Value ratio', which is a financial term used in the context of mortgage lending and real estate. The LVR is a percentage that represents the ratio between the loan amount and the appraised value/purchase price of a property. It helps lenders assess the level of risk associated with a mortgage.

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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. Mortgagors can obtain mortgage loans with varying terms based on their credit profile and collateral. In a mortgage loan the mortgagor must pledge the title to the real property as collateral for the loan.

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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)

NMS 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 non-applicant is typically an individual who is included in the application process but is not seeking an interest in the property that the loan is being used to finance.

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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. Non-conforming lenders provide loans to borrowers who do not satisfy the standard lending criteria of mainstream lenders, including banks.

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Non-structural renovations

Borrowers may be able to avoid taking out a Construction Loan if their proposed improvements don't affect the supporting structure of the dwelling, this is considered a non-structural renovation.



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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

An owner-occupier is an individual who purchases a property with the intention of living in it as their primary residence.

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Payslip

A pay slip is a document provided by employers to employees each time they are paid, whether that's on a weekly, fortnightly, or monthly basis.

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PAYG

PAYG stands for ‘Pay as you go’ and it’s where an employer withholds the tax from an individual’s pay/income and pays it in installments to the ATO (Australian Tax Office).

 

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Pension income

A type of income that some lenders may accept to service a loan, added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments.

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Pre-approval

Mortgage preapproval is a process where a lender assesses a borrower's financial situation and creditworthiness to provide a preliminary approval for a mortgage loan

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Principal and Interest

"Principal" and "interest" are two key components of a mortgage loan.

The principal is the original amount of money borrowed or the outstanding balance of a loan. It represents the initial loan amount before interest is added.

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Principal Place of Residence (PPoR)

The term "principal place of residence" typically refers to the primary or main location where an individual or a family lives. It is the primary dwelling where a person resides on a regular basis.

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Product comparison

A product comparison from a mortgage broker involves evaluating and contrasting different mortgage products offered by various lenders to help borrowers find the most suitable option for their needs.

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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

When you purchase a property, it means that you are acquiring ownership of that property in exchange for some form of consideration, usually money.

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Purpose

The purpose of a loan can help determine the loan product that best suits the borrowers requirements and objectives.

 

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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

Refinance is the process of replacing an existing mortgage with another one. It is normally to take advantage of lower rates and repayments, to change up the loan term or even switch from variable to fixed rates or vice versa at the end of a fixed term.

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Repayment type

A repayment type is 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. Rental and other rental-related income is the full amount of rent and associated payments that you receive, or become entitled to, when you rent out your property, whether it is paid to you or your agent.

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Requirements and objectives

One key aspect of responsible lending involves conducting thorough inquiries and assessments of a borrower's financial situation before suggesting lending options. The purpose of these inquiries is to gather information about the borrower's financial position, needs, and objectives. Some of these elements include income and expenses, debt obligations, financial goals and the purpose of the loan and credit history.

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Security

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

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Serviceability

Refers to the borrower’s capability to meet the repayments of a home loan. Lenders will access the borrower’s income, expenses and any other financial obligations to determine if they will be able to afford the loan repayments in their current circumstances.

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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

Spousal support is 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 standard variable rate is a rate that will go up and down over time, which means your repayments may change over the life of your loan. Your lender determines your standard variable rate (SVR) but these are often influenced by the broader financial market including the RBA (Reserve Bank of Australia) and the economy.

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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 loan 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, nonstructural renovations, debt consolidation, investing or other financial needs. A home loan top-up often works out cheaper than taking out a personal loan or a car loan as your interest rate and repayments will be lower.

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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. The term trust fund refers to an estate planning tool that establishes a legal entity to hold property or assets for a person or organisation.

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Unconditional approval

An unconditional approval means that a lender has taken the time to formally review all your paperwork with your signed loan application and decided that the borrower meets all criteria necessary 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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Mortgagee

Mortgagee is the entity (usually a lender) that holds the mortgage over a property and has the right to sell the property in case of default on a loan.

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