Mortgage Glossary

These are terms you may find yourself coming across but might not be familiar with.

Application fee

The fee paid when a new loan is set up

Basis point

A unit of measure used to describe the percentage change in value. One basis point equals 0.01% e.g. 25 basis points is the same as 0.25%

Break cost

A fee which may be payable if you pay out your fixed rate loan or switch to a variable rate before the fixed rate period ends

Bridging finance

A loan to cover the shortfall in funds when you settle a purchase of a new home before you settle on the sale of your existing home (generally temporary and short-term)

Co-borrower

When two people sign a loan they are co-borrowers. Both parties are then jointly and separately liable for repaying the full amount owing.

Comparison rate

Usually higher than the advertised rate, the comparison rate is adjusted to take into account lenders fees and charges over the term of the loan so can be used to ‘compare’ loans between lenders. However, comparison rates are currently calculated on a $150,000 loan over a 25 year term, so the true comparison rate for your particular loan may be different.

Conditional approval (also known as approval in principle)

Conditional approval from a lender gives you an indication of how much you can borrow based on the information you provide. It is recommended you gain conditional approval prior to purchasing a property.

Construction loan (also known as a building loan)

A loan designed for building a new home or major renovations that allows borrowers to draw down funds to pay builders and tradespeople as the building project progresses

Credit limit (also known as facility limit)

The maximum amount that can be borrowed under the current loan contract

Credit reference (also known as a credit report)

A report from an authorised credit reporting agency which shows your credit history. Lenders need your permission to obtain this.

Drawdown date

The date you use your loan funds for the first time

Equity

The part of a property that belongs to the individual, not the bank (i.e. the value of the property, less the outstanding loan amount)

Fixed interest rate

An interest rate that stays the same for a set period, usually 1, 2, 3 or 5 years. This also ensures interest repayments remain the same for the period.

GST

Goods and Service Tax (GST) is a tax of 10% that applies to most goods and services sold or consumed in Australia.

Guarantee

A legally binding guarantee undertaken by a third party (usually a parent or member of the immediate family) to take responsibility for the payment of your loan if you’re unable to

Guarantor

A third party (usually a parent or member of the immediate family) who agrees to be responsible for another person’s mortgage in case of default

Honeymoon rate (also known as an introductory rate)

A lower interest rate offered at the start of your loan (often for the first 12 months) which reverts to a standard variable rate after the honeymoon period ends

Interest in advance

Interest charged on a loan at the beginning of the time period e.g. when interest to be accrued over the year is charged at the beginning of the year

Interest in arrears

Interest charged on a loan at the end of a set time e.g. when interest accrued in the current month is charged at the end of the month

Interest Only (IO) repayments

A repayment structure where a borrower defers the repayment of their loan principal for an agreed period of time and only pays the interest accrued. Once the agreed interest only period ends, the borrower must start repaying the principal as well.

Investment loan

A loan used for investment purposes (such as the purchase of an investment property or shares). It typically has a higher interest rate and may be less flexible than an owner-occupied loan.

Lenders mortgage insurance (LMI)

This is an insurance payment which covers your lender in case you can’t make your repayments. It is usually required for home loans with a loan to value ratio (LVR) above 80% and can be added to the loan amount.

Lenders agreement (also called a Facility agreement or Letter of offer)

The contract between you and your lender which sets out the terms and conditions of your loan

Line of credit

A line of credit allows qualifying borrowers to draw money up to a pre-set maximum limit as required for a set period of time. Interest is only charged on the amount drawn down and once the funds and interest are paid back, the money is usually available to be borrowed again.

Loan term

The length of your loan – usually 15, 20 or 30 years

Loan-to-Value Ratio (LVR)

The loan amount divided by the appraised value of the property

Loan top up

An increase in the amount of an existing loan

Lump sum payment

An unscheduled extra repayment made to your loan

Monthly service fee

A fee you pay each month on your loan account

Mortgage

A loan from a bank or lender allowing you to finance the purchase of a home, where you use the property as security for the loan. Mortgage also refers to the document that states the property is security for the money borrowed to purchase it.

Mortgagee

The lender – the organisation who lends the money and holds the mortgage as security

Mortgagor

The borrower – the individual or entity who must repay the loan, and who gives the lender a mortgage as security

Mortgage broker

A person who has an established network of lenders, who can advise borrowers on the right type of loan and help them to arrange the loan

Mortgage protection insurance

An insurance that covers you in the event that you are unable to meet your mortgage repayments in the event of death, sickness, unemployment and disability.

Offset account

A savings account linked to a mortgage to ‘offset’ the loan principal by the amount in the account. This has the effect of reducing interest payable on the mortgage.

Owner occupied loan

A loan used for the purchase of a property that the borrower intends to live in themselves. These loans tend to have a lower rate and more loan options than investment loans.

Prepayment

Any extra loan payments you make on top of your scheduled minimum repayments.

Principal

This is the initial loan amount. It also refers to the amount still owing on your loan. Interest on a loan is calculated on the amount of principal remaining.

Principal and Interest (P&I) repayments

A repayment structure where you repay the interest as well as some of the principal in each repayment

Property value

Your property value as determined by your lender. Your lender may use your property’s purchase price, get an external valuer or do their own valuation to determine the property value.

Rate lock

This allows you to lock in a fixed interest rate quote for three months when your loan is approved. If interest rates go up before the loan drawdown date, you’re guaranteed the original rate.

Redraw facility

A loan feature that lets you easily withdraw money from any extra repayments you may have made onto your loan.

Refinancing

This involves paying off an existing loan and setting up a new one with a different lender. You may choose to do this if your existing lender can’t offer you the rate or loan features you require.

Repayment

The amount your loan contract says you must pay the lender at an agreed time (usually fortnightly or monthly).

Repayment holiday

If you are ahead in your repayments, you may be able to apply for a break or ‘holiday’ from your repayments.

Security

An asset such as a property or a term deposit that can be used to secure your loan

Split loan

When you divide your loan into multiple parts (usually two). You may choose to do this so that a portion of the loan has a fixed interest rate and the remainder has a variable interest rate.

Term deposit

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. Typically used to earn more interest on savings as the interest rate is often slightly higher than for money in an everyday bank account.

Variable interest rate

An interest rate that can move up or down. Movement is often based on the official cash rate, but it can also be moved at the lender’s discretion. Your minimum repayments will change in line with the variable rate determined by your lender.

Variation

Changes to an existing loan with the same lender such as a loan split or product switch.