Everything you ever wanted to know about loans, explained in simple terms.

A

AAPR: Also referred to as a Comparison rate, the Average Annualised Percentage Rate reflects the total cost of your loan by taking into account costs other than the advertised interest rate. This is then expressed as a total cost to you over an average loan term. So basically it is the combination of the interest rate and any compulsory fees that are charged to the loan (and this is key) expressed as a percentage of the actual loan amount. Initially devised to show up those horrid honeymoon rate loans that had super low introductory rates and then jumped up extravagantly once you were locked in; the issue with comparison rates is the lenders can get around allowing for fees by charging them to a different account - remember its only fees charged to the loan which are included - and they don’t talk about incalculable fees like redraw fees which can add up dramatically but can’t be estimated upfront (who knows how many times you might redraw and therefore how many to include). The thought was good but in practice they fall down a little.

Acceptance: To agree to the terms and conditions of an offer contract. Sign on the dotted line and return – usually with an expiry date. Usually referred to as “signing your life away”, but actually that’s the mortgage…

Additional Repayment: Additional funds paid off your loan which exceed the minimum monthly repayments. All loans have a natural balance that drops as you make repayments – that’s how they get paid off – and anything about this amount is called “additional repayments” and in most cases can be accessed via “redraw”, or transfer back out of your home loan (for emergencies and other worthwhile purposes. Because interest is calculated on the current daily balance these additional repayments both put you ahead and save you loads of interest. This typically makes it a perfect place to stash your spare money & save interest & of course you can still access it if you need to.

Amortisation: To pay off principal and interest under a loan over a period of time. Amortisation is the actual function of repaying your loan and its pretty cool to graph. Basically, your typical principal and interest repayment is made up of the interest due on the outstanding balance, and an amount calculated to repay the principal over the balance of the loan term. Next repayment the interest is less (because the balance has dropped from the amortisation) and more goes to principal and so on and so forth until it’s all paid off.

Application fee: A fee paid by a borrower to cover the costs of establishing a loan. These days most loans have low or no application fees, a couple of hundred dollars at best on average and for pro-pack loans just a small charge to cover legal costs. Its important to note that the application fee often covers the valuation and legal fees for one loan and one property.

Arrears: Overdue payments which are due to be paid. Uh Oh, lets not get in arrears ok – but if you do, ask for help as soon as you can. Most lenders have excellent programs for hardship situations if you communicate with them early and often. Arrears will accrue interest and if they continue beyond 60 days they can attract additional penalty interest rates.

Assets: Items of value which you own. Eg Property, Cash, Furniture & Fittings etc. The big stuff generally. Banks ask you to list your assets and liabilities on your home loan because it gives them a picture of your financial life, you know, do you have more assets that you have loans? Do you have an appropriate “balance sheet” (the list of assets and liabilities” for your age and income? This gives them a very very rough view of the way you run your financial life.

B

Balance Sheet: A financial statement confirming assets, liabilities and capital. What you own on the left, what you owe on the right. Hopefully the left hand column adds to more than the right hand column – this would show you’re reasonably good with your money & going places. Lenders like to use this as a very very rough guide to your appetite for loans and accumulating assets.

Balloon Payment: A final payment finalising a debt in which the amount paid is substantially more than previous instalments. Usually applicable in car or equipment finance, you might choose to have a larger balloon payment where you plan to sell the asset in 5 years (for example) and you want to reduce your repayments along the way to make it more affordable. The key is ensuring the asset is worth more at the end of the loan term that the residual balloon payment. If not, we call this ‘negative equity’ – or “upside down on a can of coke”, not an industry term.

Borrower: An entity or person/s borrowing money. This one is pretty clear. If you’re looking for a loan you’re the (potential) borrower.

Breach of Contract: To break the conditions of a contract which have previously been agreed to. Like any contract, there are provisions for what can happen if you break the agreed terms, which can include a financial penalty. Remember, you don’t have to sign anything you’re unhappy with & you must read and understand everything that you sign. The flip side of this is most contracts are written in language which most of us don’t understand, and, most loan contracts are long and other than the interest rates and fees, fairly standard – which both means they should be very consumer safe in legal terms, but equally, if you don’t like the terms you probably are not going to find much different elsewhere. The one point I would highlight right here is to treat a fixed rate like entering into a contract and see more about Break fees which are a specific breach of contract for a fixed rate term.

Break costs: A cost incurred for paying out a loan balance on a fixed term loan before the term has expired. In shorthand these are a complicated calculation ending in a penalty that you will pay for breaking the fixed rate early. The longer explanation is it’s a penalty that reflects the loss of income the lender will incur because of the fixed rate ending early, basically, if they had leant the money to you for 5% (for example) and you had a year to go, and now they can only get 4% from another borrower, they want you to cover the 1% difference for the balance of the term. In actuality lenders are borrowing the money themselves and agreeing to a fixed contract with their lenders that they have to honour, so they are passing on their loss to you. I can’t stress enough to you to treat a fixed rate as a contract and understand exactly what you are agreeing to (and for a lot of borrowers it’s a very good idea to fix at least part of your loan). Its important to note you can incur a break cost if you:

• Sell your property

• Switch to a different loan type or refinance the loan

• And / or Repay more than the allowed repayments – pretty important to note.

Most lenders allow up to $10,000 per year in additional repayments during a fixed rate without penalty (can’t access them in most cases though) which is roughly $200 a week and usually not an issue. When considering a fixed rate you should think about your future plans, if you’re thinking about selling or if you’re expecting to be able to extra repayments then talk with us about how you can structure the loan to benefit from the fixed rate and still have the flexibility you need.

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. So very very handy when you don’t want to have to packup and move twice! OK, there are pitfalls, you have to have a tonne of equity in your home to qualify, interest can add up and you’re taking a risk if you cant sell your place, but honestly worth a look at. Bridging loans differ from regular loans because they generally test your “affordability” for the loan (whether the bank thinks you can afford it or not) based on what you’ll owe at the end and not the total loan on both places (which few people would qualify for), and, they usually have a function built in for saving you repayments while you sell your old home, like the ability to add the interest to the loan, or repayments based on only your “end debt” (what you will owe after the sale).

C

Capital: The current value of your assets. Eg Property, Cash, vehicles etc. The left hand column in a balance sheet. Your capital is different to your equity – which is the total capital value less what you owe.

Capital gain: The financial gain received when selling an asset for more than you initially purchased it for. This is what we’re aiming for when we invest in property. Imagine selling a property and making $100,000 or more – even after capital gains tax that sure beats paying off your loan with your after tax income every week! And ask me about capital gains tax and why its nothing to be afraid of.

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. Not common these days sadly, but its like hedging your bets – a fixed rate loan which can drop if the market does but not exceed a ‘capped’ or maximum rate during the term. They appear to be more beneficial to the borrower than the lender which is possibly why we don’t see a lot of them on offer any more, but its more likely because of the way the lenders raise their funds.

Cash Flow: In relation to company accounts, reported net income plus amounts charged off for depreciation, amortisation and extraordinary charges to reserves. In business and consumer terms its what is coming in vs what is going out and the timing of this. Cash flow is king – no point in having a bucket of money coming to you if it’s too late to meet your commitments. Simple ways to improve your cashflow can be to align your repayments to your pay cycle, even better if you can get the repayments to come out a few days after pay day – and not to rely on lump sum money which isn’t paid regularly, like bonuses. Keep these for surplus rather than relying upon them.

Certificate of Title: A document which details the ownership of land and the dimensions or other details of a property as well as any restrictions that apply to it (also known as encumbrances or easements which can be rules about how and where and what you can do on the block). Also known as a CT. This is basically the record that shows who owns the place, and mortgages are recorded with the title at the lands title office in your state, generally there’s also a record kept of everyone who owned the property previously. Once you’ve paid off your loan the certificate of title is returned to you (make sure you put it somewhere safe). CT’s have just gone electronic which poses an interesting question – when you payout your loan now, what do you get? An email?

Commercial Property: Property intended for use or occupancy by retail and wholesale businesses (e.g. stores, office buildings, hotels and service establishments). Interestingly this can be a residential home that is presently being used as an office, or that has the capability to be used for commercial purposes, think a hobby farm that has a shed setup at the roadside to sell a few boxes of fruit. True commercial property is treated as a riskier proposition by lenders; sometimes finding tenants is harder than for residential property and therefore the terms of any loan involving commercial property are different and the interest rates are higher.

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. This has largely been replaced by the NCCP (National Consumer Credit Protection act of 2009).

Conveyancing: A legal process to transfer ownership of property from the seller to the buyer. The work of conveyancing is both simple and complicated – simple in that it involves a few forms being completed and submitted to the lands title office & you can technically do it yourself – and complicated in that it’s a very long document to read through and understand and there are checks that should be done as part of the process, like, are there proposed developments, roads, schools which could make living in your new place awful. Is the strata fund healthy or are you looking at a big bill to cover repairs? Are there disputes with neighbours that could impact on you? The experience of a conveyancing professional makes all the difference and its money well spent. I always choose a conveyancer or solicitor who is available when you need them - no good using a trial lawyer who will be unavailable if you need advice quickly.

Contract for Sale: A contract used in the transfer of property, which documents the conditions for the sale of the property. These vary from state to state but typically have a set format and will include documents that show a summary of the title and any restrictions. Often they will include letters from council which detail the rules of use of the property, the flood rating and hopefully a topographical survey. The contract is what you sign when you buy the property and it will have terms like the timeframe you have to settle on your purchase.

COSL: The Credit Ombudsman Service Limited. Like any ombudsmen they can offer assistance if you have been unfairly affected by a credit contract. They are external to the lenders and borrowers and might act as a mediator to get a faster resolution.

Credit Limit: maximum preset amount a borrower can use on a loan account. The amount that you cant go over. The limit drops along with the amortisation of the loan until you’ve paid it off completely.

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. Your credit report shows your last 5 years history so treat it like gold – a ‘busy’ credit report can prevent you from borrowing money and anything nasty on your credit report will almost certainly lock you out until it disappears off of your file. New legislation means credit providers can now report ‘positive’ credit history, in other words – always pays their bills on time & this can help some borrowers who may otherwise have been affected by hiccup on their file. The key in these cases if you have any issues is to communicate with the lender early and often, before it hits you file, and by all means don’t be a ‘credit junky’ making unnecessary applications. Shop around, but do it smart – use a broker, don’t sign privacy forms / allow credit checks, until you know you like what’s on offer.

Creditor: A party who is owed money, aka the lender. The creditor has a business in lending you money and they vary both in terms of what they offer and who they will lend to. In getting ready to borrow money it’s helpful to put yourself in their shoes, would you lend your money to someone who has your job history, your list of assets and liabilities, your credit report? Hopefully that’s a yes!

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

D

Daily Interest: Interest calculated on a daily basis. Interest is calculated daily but charged to your account typically monthly. This is why weekly and fortnightly – frankly any additional repayment – saves you interest, because it reduces the balance sooner and therefore the interest bill. It’s a self propelling method too – the less the interest is, the more goes off of principal, the less the interest is… etc. Here’s an exercise, take your current loan balance, multiply it by the interest rate, divide by 365 – that’s how much interest you’ll pay today, just don’t look at it too long….use it to motivate, not exhaust you!

Debt Service Ratio: Lenders calculate the Debt Service Ratio (DSR) by taking into account a borrower’s expenses as a proportion of their income. Its just on of a number of methods of checking that your repayments should be comfortable. Generally you’re not allowed to exceed a certain percentage, say 35% of your income allocated to repayments.

Debtor: A party who owes money to another. Also known as a borrower, pretty straight forward.

Default: Failure to make a loan repayment by a specified date. This is really bad – we do not want to be in default. Basically the repercussions will be a black mark on your credit file, a penalty interest rate being applied to your loan & lots of unconformable phone calls. I will say again, if you see yourself getting into trouble – and it can happen for reasons beyond your control – then communicate with your lender sooner and often & you’ll find them very helpful.

Deferred Establishment fee: A penalty which may be charged when a loan is repaid by the borrower in full. Thankfully these have been outlawed in 2011 so you shouldn’t come across them in any new loan contracts and I am seeing the very last of them being active round about now. Basically this was a cost to offset the lenders costs when you paid out your loan within the first 5 years. Good riddance I say.

Direct Debit: A deduction of funds from a customers bank, credit union or building society account. In my opinion the simplest, less stressful way to pay your bills on time, every time, which is great with new positive credit reporting. Plus you don’t have to think about it. My advice is keep a good buffer in your offset account (it saves interest sitting there) and makes sure you always have enough should they all come out at the same time, and set everything to direct debit for an easy life. I still check my bills and my statements though – it doesn’t remove that responsibility.

Disbursements: Fees and charges which are usually imposed by the solicitor when establishing a loan. Disbursements might include excessive photocopying (note, the solicitor decides what is normal photocopying and what is excessive) and other items paid for on your behalf, like searches and inspections that they pay for, then you pay back to them at settlement. These are added to your bill and are in addition to your regular legal fees.

Discharge Fee: A fee imposed by the lender to process the discharge of a loan when it is paid out. Typically this is a couple of hundred dollars and represents their costs in getting the file out and having a solicitor look after the discharge.

Draw down: A draw down is the transfer of money from the lender to a borrower after the loan has settled. You start paying interest on any money that has been drawn down, as soon as it is paid to you. In the case of spare money in a loan (like a refinance where there will be surplus money) it could be a great idea to park this in your loan or your offset account until you need it, so you don’t pay unnecessary interest. In the instance of a construction loan, these are progressively drawn down as each stage of the building is completed, so again, you only pay for what you owe.

E

Early Repayment Penalty or DEF: If a loan is repaid before the end of its term, lenders may charge an early repayment penalty. See above on Deferred Establishment Fees, no longer allowed.

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. Ahhh this is a good one. Equity is that bit of the property that you own. Quite literally, what’s it worth – less what you owe = your equity. This is, however, different to accessible or useable equity, which you might want to access for future investment or a holiday – lenders wont generally lend more than 90% of the property value, so again, what is it worth, multiply this by 90% and take away what you currently owe and this is what you could potentially access.

F

Facility: A term used to describe a loan account. Would you like one facility or two? Just jargon, think of this as a loan or a loan split.

First Home Owners Grant: An incentive from the Federal Government giving a grant to first home buyers as a one off payment. Extremely helpful for those starting out and can also include stamp duty exemptions. There are conditions and terms attached to the grants which do change from time to time.

Fixed Rate: An interest rate set for an agreed term. Eg. for 2, 3, or 5 years. Fixed rates are akin to a contract – you agree to pay the lender than interest rate and repayment for a set period of time. This is convenient in that you know exactly what your repayments will be over the time but there is a payoff, most people believe that in the majority of cases the bank wins (I know I have certainly been glad of a fixed rate at times, so I’m in two minds about this) and you will lose some flexibility, so it’s important to consider your short and medium term goals in relation to fixing. Generally, if you have no plans or needs to change property or lender, and your budget is tight or its your first loan and you’re finding your feet, and especially if the fixed rate is lower than the variable rate – which happens from time to time – then you have to at least have a good think about your options.

G

Guarantor: A person giving a guarantee who agrees to pay another person/s debt if they default on their loan payments. This can also be a security guarantee, where they offer their property as an additional security to keep your loan under 80% of the value of the combined securities, which has huge advantages for you as a borrower. Generally a guarantor is used to give comfort to a lender where a borrower has less than ideal circumstances – typically its younger people borrowing for their first time.

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. You need to allow for this in your calculations as well as other costs you can expect, like your legal fees, pest and building or strata inspections, and loan application fees.

Gross Income: Income before tax, superannuation or payroll deductions. So the total income that you earn in a particular period. Lenders use this figure in their calculations deducting tax and other deductions automatically.

Genuine Savings: Genuine savings are a requirement where we are borrowing more than 90% of the value of the house and simply put it means savings that have been made and held for at least 3 months. It shows a capacity to regularly save money and the potential to repay a homeloan as the amount you save and the rent you presently pay may come close to the regu­lar repayment you will commit to. Any gifts or proceeds from the sale of personal items will not be allowed as genuine savings until they have been held in your account for at least 3 months, and where you have made other deposits to increase the balance.

Ideally genuine savings must be kept in a separate account with few - if any - withdrawals. Make regular deposits of smaller amounts rather than lump sums if at all possible, this means the lenders will ask fewer questions. If you can try to look at the figure you need to save and the time frame in which to do so. Divide it up and work out how much you need to save each pay period. It is easier to forgo the movies or a night out if you know your goal and you know it’s for a short time only. Genuine savings can include shares and other assets which have been held for at least 6 months, the key is showing that you have an ability to manage and accumulate savings.

H

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. Rarely seen these days as its well understood the ongoing interest rate is likely to be higher and without early exit penalties the lenders stand to lose money when you leave, so they’re not as attractive

I

Interest: A lenders charge for the use of funds or the return on deposited funds. Basically the main income for the lenders in order to offer you and I a loan.

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. Typically used by investors or where cashflow is tight for a short period of time, its important to understand how you’re going to make the ongoing repayments when you’re thinking about taking an interest only loan. In most cases there’s nothing preventing you from paying principal if you so choose.

Interest Rate: The rate at which interest is applied. Generally expressed as a percentage rate pa, they could be variable, moves with the market – or fixed, locked in at an agreed rate for an agree term. The interest rate is obviously important however its not everything in deciding which loan to choose – for example, a small loan with a low interest rate but a very high annual fee will cost you more than one with a higher rate and no fee. And of course its important to check the features are going to allow you to maximise your savings.

L

Liabilities: A debt which one is liable for. Eg. Mortgages, personal loans, credit cards etc. Your liabilities will be important to a lender both as an indicator of your appetite for debt (and then they want to look at your repayment history) and your ongoing repayments to make sure everything is affordable for you. Ideally you want as few liabilities as possible so when you’re planning on buying think about paying off and closing as many loans or unnecessary credit cards & interest free facilities as you possibly can.

Line of Credit Loan: This is a flexible loan that allows you to have funds transferred to your cheque account when required. Consider this like a giant credit card – you pay it off simply by putting money into the loan and leaving it there – generally there are no set repayments. For this reason its generally not suitable for people buying their own home as usually you want to pay these off as soon as possible and it can be difficult to make progress in repaying them. That’s not to say it cant be done – it can, but it takes more discipline and understanding. Often there’s a higher interest rate for a line of credit as well. This type of loan might suit investors who want ready access to cash and the flexibility of a long term interest only loan.

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. Pretty straight forward. You borrow money, you repay it.

Loan Agreement: The contract between the lender and the borrower which sets out the conditions that apply to the loan. The loan agreement sets out the interest rate, any applicable fees, the repayments and repayment term, who the lender and the borrower are, the security that is being offered and other key information. It is a daunting document to look at with pages and pages of fees that can be charged to the loan (because the law says they must be included) even though you possibly wont ever incur them, things like additional statement fees or production fees – see, I bet you didn’t even know what these things are. My advice is always always read through this document with someone – your solicitor or conveyancer or your broker, so that you aren’t overwhelmed.

Loan to Value Ratio (LVR): The percentage of the value of the property that you propose to borrow. Why is this important? Well if you are borrowing over a certain percentage value of the property additional costs and rules come into play – the less equity you will have in the home means the more risk your lender is taking on and they adjust the terms accordingly. That makes sense, right? Presently a lower LVR (loan as a percentage of the value of the property) will also attract a lower interest rate, so valuations are very important and you should be realistic – but question a valuation that you think is definitely incorrect.

Lender’s Mortgage Insurance (LMI): LMI is literally an insurance policy for the lender in case of default. It allows the lender to make a claim for the entire monies owing plus any costs. The Insurer will then sell the house and if there is still a short ­fall they will still look to you for payment LMI does not protect the borrower but in many cases the borrower must pay the premium. Without LMI lenders would not let you borrow more than 80% of the value of your proposed purchase so we have to try and think of it as a tool to get us into the home. Like any insurance policy, the price of the LMI policy is based on each applicants particular circumstances and we can only ever estimate what that premium might be. LMI can also vary from lender to lender, something a broker can help you assess.

Lump Sum Payment: An additional payment made by the borrower to reduce the loan amount. These payments are typically in addition to regular instalments. The benefit of a lump sum payment is obvious – more money into the loan means more interest is saved & sooner, and most often you can ‘redraw’ these repayments. Occasionally you don’t want access to this money in future so you might consider asking the lender to permanently reduce your loan limit based on your lump sum repayment – then your ongoing repayments can also be reduced or you can just continue as is and pay the whole loan off sooner.

M

Maturity: The date a debt or investment must be repaid. Most home loans have a 30 year term so the maturity date is the date you are expected to have your loan paid off in full.

Mortgage: A form of security for a loan over property given to the lender for the repayment of the loan. The mortgage itself is a simple document signed and lodged with the lands titles office in your state which makes it official and means that anyone dealing with your title has to understand the lender has to be repaid before anything can happen. Interestingly the mortgage doesn’t actually have an address on it – like 12 Baker street for example – it has your lands titles reference which might be something like DP-336600. When people talk about signing their life away with a loan document – I politely point out that’s probably more the mortgage document than the actual loan agreement.

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. Also known as Lenders mortgage insurance in Australia

Mortgage Manager: A company responsible for the day-to-day management of loan. A mortgage manager is typically a non-bank lender who will go to a wholesale bank and make an agreement to borrow a tranche of money, make their own terms and conditions and then offer it to borrowers as part of their business. Mortgage managers were largely responsible for the growth in brokers in Australia, and the rise in competition between the lenders, for this we salute them. Usually they have carved a niche by offering unique loan terms or policy points to suit a particular borrower.

Mortgagee: The lender of the funds. Fairly straight forward – those who hold a mortgage over your property.

Mortgagor: The person borrowing money in the terms of the mortgage. Cant have a mortgagee without a mortgagor.

N

NCCP (National Consumer Credit Protection act of 2009) Legislation designed to protect consumers from unfair lending terms. Everyone involved in offering credit in Australia is bound by the act and must be sure the loan agreements are not unfair for consumers and not “unsuitable” for the borrower, which includes making sure via various means that you can definitely afford the loan.

Net Income: The income received by an individual after tax has been taken out. Basically what you receive in your bank each pay cycle.

Net Profit: The profit remaining in a business after all expenses have been taken out, but before tax. I also talk about net profit from the sale of a property – so whatever is left after all of the costs are paid out.

O

Owner Occupied: Property that is lived in by its owners, as opposed an investment property which is usually occupied by tenants paying rent. If you live in a home you own, you are an owner occupier. This is an important distinction as lenders are now differentiating between investor and owner occupied lending.

P

PAYE: Abbreviation for Pay-As-You-Earn, a taxation procedure for wage and salary earners under which income tax is deducted in instalments from periodic pay. Also known as PAYG (Pay as you Go). Basically if you work for someone who deducts tax from your income this is you!

Principal: The capital sum borrowed on which interest is paid during the term of the loan. The balance of your loan at any given time is the principal sum remaining – and the P in P&I (principal and interest) repayments represents the portion which goes to principal.

Principal & Interest Loan: A loan where you repay a portion of the principal and the interest over the term of the loan by regular instalments. The opposite being interest only repayments – where, obviously, paying the interest is the only requirement. In P&I repayments the interest component drops each month based on the interest due, because the balance has dropped, based on the principal repaid – the repayment itself stays the same, just the split between the P & the I changes!

R

Redraw Facility: If you have made any lump sum or additional principal repay­ments to your loan account, you can access those extra repayments whilst on a vari­able rate. This access is called redraw. Obviously the redraw is handy because you can access the money which has been stashed away saving interest, but be aware than of course this also means your balance increases and so does your interest due.

Refinancing: This means that you switch your current loan from one lender to another, this might be to save interest, to access equity or to get better features on your loan and have it work better for you. Its very important to look at your loan every few years and consider refinancing if you can make a considerable saving by doing so. It’s a simple thing for your broker to check whether you could save money doing so – and a good broker will give you tips on how to save your money with your current lender first knowing that this is your cheapest option.

Regulated Loans: Loans which are considered for personal use and is governed by regulations of the Consumer Credit Code & NCCP. Typically, this is any loan offered to a consumer as opposed a business loan, for example a loan to buy a commercial property. It basically invokes a special set of consumer protections.

S

Secured: To take guarantee over property for purposes of protecting a loan. The security is registered as a mortgage with the lands title office or registered on the personal property security register PPSR in the case of a vehicle loan. The lender cannot do anything with your security – like sell it – unless you are in default on the loan for an extended period of time, and we don’t want that to happen.

Security: An asset used to guarantee a loan. Like your home in the case of a home loan – or a vehicle or piece of equipment being financed. The key is if it can be identified via a registration number or a VIN number then it could be used as security, and if it does not – it probably isn’t suitable as security.

Serviceability: Ability of borrower to make and meet repayments on a loan based on the borrowers expenses and income(s). Also known as capacity to repay. Serviceability is one component of assessing a loan – but it’s a very crucial one. In its simplest terms the lender looks at your net income, deducts your living expenses and other repayments and then calculates if there is enough income left over to meet your new commitments, allowing for interest rate rises for just in case.

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 is the exciting bit – this is when it becomes yours – but you have to start paying for it too!

Settlement Date: A specific date at which buyer is to take possession of property upon finalising payment. The day it becomes yours. Big smiles.

Signatory: A person authorised to access an account. Generally this is you and any co-borrowers on your loan.

Stamp Duty: Also known as Transfer 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. There are exemptions and discounts applicable for first home buyers buying new homes in most states.

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. The standard variable rate is the basis for most of the discounted loans – for example 1% off the standard variable rate with XYZ package. Banks often jostle for and advertise that they have “the lowest Standard Variable Rate Home Loan”, which makes me laugh because no one is paying standard variable rates anymore and the discount you can achieve varies from lender to lender – so lender A may have a standard variable rate which is 20 pts higher but may offer a 1% discount and bank B is 20 pts cheaper but only offers a 0.6% discount. As a consumer its difficult to easily make these comparisons.

T

Term: The length of a loan or a defined period within that loan. Generally 30 years for a home loan, and 5 for a vehicle loan. The key is the sooner you pay it off the more interest you will save – in general terms.

Transfer: A document registered with the Land Titles Office noting the change of ownership. Your solicitor will draw this up & lodge it for you.

V

Valuation: A professional opinion of the value of a property. I have a lot to say on valuations, and mostly this is reference to valuing a property being a difficult artform almost, not an exact science. A valuation typically compares your home to other homes that are like yours, that have recently sold in your area – if you have an unusual home for the location, such as an acreage property in a suburban estate, or a 7bedroom home, you will find this process much more difficult. Work with your broker to get it as right as possible.

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. Variable rate loans offer more flexibility than fixed rate loans – but of course the payoff could be rising interest rates.

Vendor: The seller of a property. With respect I often tell my clients when you are buying a home you are not making friends with the vendor – they’re moving on, so don’t be rude but certainly look after your interests. It’s the neighbours you have to be nice to.