Financial Dictionary

The More You Know, The More Your Wealth Can Grow

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Basic Variable

A home loan that offers a lower interest rate due to limited features; often aptly described as a “no-frills” loan. The interest rate is subject to change alongside the movements of the Reserve Bank.

Bridging Loan

If you need money to purchase a new property before you have sold your existing one, it is sometimes possible to enter into a short-term loan (usually 12 months or less).

Cross-collateralisation/cross-securitisation

Using the collateral from one loan as the collateral to secure another (usually from the same lending institution). Experts generally don’t recommend cross-collateralising loans; however, it may be necessary in some circumstances. Be sure you fully understand the pros and cons before proceeding with this type of loan.

End Loan (Bridging Loan)

If you need money to purchase a new property before you have sold your existing one, it is sometimes possible to enter into a short-term loan (usually 12 months or less).

Equiry Loan

Using the equity in your property to borrow money. Also, referred to as a, “line-of-credit”, this sort of loan enables you to use the value of your house to access funds for investing in another property.

Fixed Rate Loan

A loan in which the interest rate stays at the same percentage for a set period, meaning it can’t increase (or decrease) in line with Reserve Bank changes.

Interest Adjustment

If you decide to make additional repayments on a fixed loan, the lender may charge an interest adjustment cost. (The interest adjustment date for your mortgage is the date the amortization period begins). You will be required to pay an interest adjustment amount if the mortgage funds are advanced before the interest adjustment date.

For example, your mortgage payments may be due on the 1st day of each month. If you buy your home on March 15, your lender will advance the mortgage funds on that date. You will be required to pay an interest adjustment amount to cover interest from March 15 to March 31. The amortization period of your mortgage will begin on April 1 (the interest adjustment date), and your first mortgage payment will be due on May 1, for interest from April 1 to April 30.)

Low Doc Loan

Useful for the self-employed, a low doc loan is sometimes offered when the borrower cannot produce regular pay slips or tax records to prove how much they earn.

Mortgage Offset Account

An option with some loans that allows the borrower to use funds held in a everyday transaction account to offset the amount of interest charged on repayments. For example, if you owe $300,000 on your loan and have $5,000 in your everyday bank account, you only need to pay interest on $295,000.

No-Deposit Home Loan

A home loan that allows you to borrow 100% of the property’s value, often at a higher interest rate than that of a standard loan. You will usually need an impeccable credit history and proof of consistent income to be approved for this type of loan.

PPOR

Principle Place of Residence. The home you own and live in.

Rental Yield

Gross rental yield is simply a percentage of the rental income against the property’s value. Net rental yield is a percentage that also factors in the costs of maintaining a property as well as loan costs.

Serviceability

The ability of a borrower to pay off a loan, usually based on DSR (see above).

Split Loan

A loan which you can split into both fixed and variable rate components.

Variable Rate Loan

Under this loan, interest rates are subject to change alongside Reserve Bank and market changes, meaning monthly repayment amounts may rise or fall.

Break Costs

If you are paying off a loan with a fixed-term, fixed-interest rate and decide to “break” from this fixed rate early, the lender will probably charge you for it.

Credit File

A file that includes your personal information as well as your Consumer Credit Information, including credit applications, monthly repayment history on any mortgages or credit cards, and whether you hold any overdue debts. Lenders refer to this as part of the approval process.

DSR

Debt to Service Ratio. This is a figure calculated by lenders in order to determine whether or not you will be able to pay off your loan. The DSR is usually worked out by calculating the percentage of income it will take to make the repayments.

Equity

The value of a property minus the amount still owed. For example, if you were paying off a loan for a house that could be sold at $900,000, but you still owed $200,000 on that loan, the equity would be $700,000.

First Home Owner’s Grant

A one-off grant introduced by the Federal Government in order to ease the cost of purchasing a first property.

Income Insurance (Mortgage Protection Insurance)

This covers the borrower in case they can’t make mortgage repayments due to loss of income or other pre-defined circumstances as per the schedule in the insurance policy. This is different than Lender’s Mortgage Insurance in that it protects the borrower, not the lender.

Interest Only Payments

A loan option where only the interest is paid off for a set amount of time.

Lender’s Mortgage Insurance (LMI)

An insurance that covers a lender in case the borrower cannot make their loan repayments. Lenders usually take this out when a borrower has a LVR (Loan to Value Ratio) greater than 80%.

Liabilities

When applying for a loan, lenders describe your debts, (such as existing loans), as liabilities.

Loan Structure

The way in which a loan is set up. There are many options and it is beneficial to consult a loan expert like a mortgage broker.

LVR (Loan to Value Ratio)

When a lender considers your loan application, they calculate the percentage of the loan amount against the property’s value. For example, if applying for a loan of $300,000 in order to purchase a property worth $400,000, the LVR would be 75%. In most cases, 80% is the highest LVR a lender will consider without LMI (see above).

Mortgage Protection Insurance (Income Insurance)

No Doc Loan

In some cases, lenders offer loans that require no proof of income in order to borrow a low LVR (Loan to Value) amount. The borrower must instead sign an agreement that they will be able to pay off the loan.

Refinancing

Taking an existing loan and paying it off with a new loan, usually to get a lower interest rate, reduce monthly payments, or consolidate debt.

Reverse Mortgage Insurance

A loan for seniors that enables the borrower to use their equity to borrow a small LVR (Loan to Value) and not make any repayments until the property is sold.

SMSF

Self Managed Super Fund. A common way of saving for retirement, an SMSF is a superannuation fund in which the owner is also the trustee and is responsible investment decisions and compliance with laws.