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Loan Jargon Explained

Here we try to put the confusing jargon into some semblance of normality for you!

Application Fee

also called Establishment Fee by some banks, this is the fee the bank charges to process your loan

Auction

This is when you bid on the day for a property, if you are the successful and highest bidder you must pay the agent a deposit on the day (or later by prior arrangement) and the sale contract must be unconditional, you are not allowed finance clauses, or pest and building inspections etc

Conditional Approval

This is issued by a bank once the preliminary checks of your application are complete. Some common conditions that need to be met prior to the Formal Approval being issued are “subject to valuation report” or “subject to providing the bank with further specific documents” etc

Contract of Sale

When you make an offer on a property for sale, after your offer is accepted the selling agent will prepare a Contract of Sale for you to sign as the purchaser. The contract sets out the seller and purchaser details, the agreed price, settlement date, plus any conditions and legal requirements. An “Unconditional” contract is one that has no conditions and is also known as a Cash contract, these are usually used at auctions.

Conveyancer

This is a qualified person that handles the settlement on your behalf, they liaise with the Vendor’s agent, the banks and the Lands Title Office to ensure the property is transferred to your name. In some States a solicitor does this work

Fixed Rate Loan

is when you select an interest rate and a fixed term, generally 1-5 years. The bank will not move the rate up or down whilst fixed. Some banks do have restrictions with fixed rates on how much extra you can pay off the loan. If you try to discharge the loan for any reason whilst the rate is still fixed you may incur a hefty fixed rate break fee, so think carefully before selecting a fixed rate

Formal Approval

Also known as “Unconditional Approval” this is when the bank has completed all of their assessment and checks of the borrower information, and the loan application is fully approved

Honeymoon Rate

This loan usually offers a very attractive upfront interest rate for a limited period e.g. 6 months, 12 months etc but after the initial honeymoon is over the loan reverts to a higher standard variable rate

Interest Only Loans

normally used for investment loans, each loan repayment is 100% interest and the principal loan balance does not reduce, this maximises the tax effectiveness of the loan

Lands Title Office (LTO)

This is the Government department run by the individual States that holds the records of all property transfers, and collects the revenue from property transfers etc

Lenders Mortgage Insurance (LMI)

If you wish to borrow more than 80% of the value of a property (whether a purchase or a refinance) then most banks require LMI approval. LMI is a one off upfront fee charged to you, the customer, but it does not offer you any protection or cover. In the event you default on your loan and the bank sells your house for a loss, then the bank claim against the Mortgage Insurer for that loss. Some banks allow you to add (called Capitalising) the LMI fee onto your loan

Letter of Offer

Once your loan is approved the bank (or their settlement agent) will prepare the mortgage documents and send them to you to sign. The Letter of Offer outlines the borrower’s details, the loan type, rates, repayments, fees, charges, terms and conditions

Loan to Value Ratio (LVR)

The LVR is basically the amount of loan required divided by the property value, and the resulting LVR can affect the interest rate, it can mean Lenders Mortgage Insurance is payable, it could mean genuine savings evidence is required and other factors. For example if your loan required is $300,000 and the property value is $350,000 then the LVR is $300k ÷ $350k = 85.71% LVR so Lenders Mortgage Insurance would be required

Offset Account

this is a savings account the bank links directly to your loan account, and every dollar you keep in your Offset Account helps to reduce the interest charged on your loan. For example if your loan was $250,000 and you had a cash balance of $20,000 in your Offset Account, then the bank will only charge home loan interest against a balance of $230,000. The other feature of the Offset Account besides the interest savings, is that your money is available daily like any savings account with an ATM card, internet banking, EFTPOS etc

Pre-Approval

These can be issued by the bank if you require peace of mind before you make an offer or sign a contract. The pre-approval is only based on assessment of your income and credit commitments, the bank will still need to complete the property valuation, sight the contract of sale etc before issuing a Formal Approval. It is important to be careful not to rely entirely on a pre-approval

Principal & Interest Loan

this means your loan repayments will be made up of both principal and interest, so your loan balance will be reducing with each payment. Traditionally in the first few years of your home loan the large majority of your repayments will be interest. Any extra payments you make over and above the minimum regular repayment are 100% principal and help reduce the interest charges and the loan term

Redraw

this is when you have paid extra off your loan, the bank may make this available to you to withdraw as cash by way of a redraw

Settlement Fee

some banks charge a fee for the legal work and preparation of mortgage documents

Subject to Finance

In most cases we recommend customers insert a clause “subject to finance” into a Contract of Sale, as this allows you to cancel the contract in the event you cannot obtain finance approval. Subject to finance clauses are not permitted at auctions, or on Unconditional Contracts

Stamp Duty

each State charges Stamp Duty to transfer a property title to another person, they also charge Mortgage Registration, Mortgage Discharge Fees, and Land Transfer registration fees. We can help explain this and provide you with quotes

Variable Rate Loan

this loan will “float” up and down as the bank adjusts their interest rates, generally variable rate loans are very flexible in that you can make unlimited extra repayments anytime for free, you can redraw the loan etc

Valuation

In most cases the bank will order a valuation of a property that is to be used as security for your loan. These days most banks use independent valuers through the VALEX (RP Data – Core Logic) system online. A lot of banks offer one valuation free of charge with a new application.