Understanding home loan jargon
The following is a brief explanation of some of the terms and jargon used when applying for a home loan and purchasing property;
Application Fees - these are upfront fees charged by the lender when taking out a home loan. Lenders traditionally charge these fees to cover (in total or in part) their internal costs for setting up a loan.
Capital Gain - this is the increase in the value of your property from your original purchase price.
Caveat - this is a notice lodged on a title and notes that a third party has an interest in the property.
Certificate of Title - this is an official document that lists who is the owner of the property and is lodged with the relevant State Government body.
Cooling-Off Period - this is the time where the buyer or seller has the option to change their mind when the property being sold is a Private Treaty. The cooling-off period is not applicable for auctions.
Comparison Rate - lenders are required to provide a comparison rate, the comparison rate is a revised interest rate that allows for fees and charges applicable to the loan.
Contract of Sale (Contract) - this is a legal document that binds the buyer and seller and lists the terms and conditions for the sale of a property.
Conveyance - the process of transferring ownership of a property from the seller to the purchaser.
Covenant - a covenant is a condition or restriction attached to your property and is noted on the Certificate of Title. Its important to be aware of, and fully understand any covenants, as they may impact a future sale or future plans re the property.
Credit Reference Association of Australia (CRAA) - this is an organisation used by lenders to check your credit history.
CRAA File - this is a report that sets out a borrowers credit history based on factual data about an applicants financial situation and standing with creditors.
Deposit - this is the amount of money a borrower provides when purchasing property. Generally lenders require a minimum of 5% of the value of the property as a deposit.
Deposit Bonds - a deposit bond is way of paying the deposit on the property you are purchasing when you don't have the money available for the deposit. There is lending criteria for deposit bonds and fees payable.
Draw Down - the physical act of loan monies being deposited into accounts by the lending institution.
Debt Service Ratio (DSR) - this is a ratio the banks determine by evaluating your current debt repayments against your income. It provides a lender with your capacity to repay a loan.
Easement - this refers to a right for one person to use, or have access to another person's property in a particular way. An example might be power lines, in order to get power to a property the power lines may have to go over another persons property. In this example the easement would give the person the right to run power lines over another person's property.
Equity - this is the value of your property that you own, which is usually the value of the property less what you currently owe to a lender.
First Home Owner Grant (FHOG) - this is a once only payment of $7000, paid by the Federal Government to qualifying applicants who are buying their first home.
Guarantor - a guarantor is a person who guarantees your loan, such that they become responsible for payment of the debt should you default. Traditionally parents are the main people who act as guarantors for their children's loans.
Joint and Several - when 2 or more people take out a home loan and one defaults, the other person is responsible for that persons share.
Lender's Mortgage Insurance (LMI) - when the value of a home loan is (usually) greater than 80% of the value of the property being purchased, it is a requirement of the loan that the borrower takes out this type of insurance. This insurance safeguards the lender (not the borrower) against loss should the borrower default. This is a once off payment made by the borrower when taking out the loan.
Loan Stamp Duty - this is a tax imposed by the State Government and is calculated as a percentage of the value of the loan.
Loan to Valuation Ratio (LVR) - this refers to the value of the loan against the value of the property being purchased. The best way to explain LVR is by using an example, if you where purchasing a property for $650,000 and needed to borrow $500,000, then the LVR would be 77%. This is calculated by multiplying the loan amount by 100 and then dividing this amount by the value of the property.
Mortgagee - a person or legal entity who lends the money to a person buying property.
Mortgagor - a person or legal entity who is the borrower of money in order to purchase property.
Negative Gearing - for investment properties when the income is less than the tax deductible expenses, then this shortfall can be offset against your taxable income.
Security - an asset used to guarantee a loan.
Settlement - this is when final monies (which is usually the full purchase price less the deposit) are paid, and the purchaser receives the title deeds, keys etc.
Title Deeds - these are the formal documents that list the relevant details of a property, such as the owner, and the deeds are stored at the relevant State Government department.
Vendor - the seller of the property.
