Glossary of Lending Terms
Anti-money laundering and Counter-Terrorism Financing Act (AML)
Strict laws now apply to the process of identifying individuals who wish to apply for a home loan. The act also provides for triggers that must be reported where an individual displays suspicious behavior in relation to the source of their funds.
Australian Securities and Investment Commission (ASIC)
The Australian Securities & Investment Commission administers the NCCP legislation – within this they appoint licenses and register credit representatives. They also have an active auditing role to ensure that all participants are complying with the Act.
Australian Prudential Regulation Authority (APRA)
The Australian Prudential Regulation Authority (APRA) was established on 1 July 1998 and is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance, friendly societies, and most of the superannuation industry. APRA is funded largely by the industries that it supervises.
A rate of interest generally applied to budget loans, which are less expensive than standard variable rate loans. However, such products may be offered with minimalist features such as redraw but are unlikely to offer mortgage offsets.
Describes the fee incurred to fixed rate loans in the case of a borrower terminating a loan contract before the expiry of the fixed rate period. These costs are not to be confused with the early exit fees that were banned by the Australian government in 2011 or discharge fees which represent the legal fees involved with finalizing the mortgage.
This describes a loan where the rate will not rise above a pre-defined ceiling for a specific time, but may fall in the event of a rate reduction.
A calculated rate intended to include additional costs however often inaccurate due to the way it is used.
CRA – Credit Reference Agency
A report ordered by a lender on receipt of your loan application from one of the two main Australian credit reference agencies. This report shows previous loan applications and judgments for the past 5 years. Too many credit inquiries over the past two years can be a common cause for an application being rejected.
The credit guide is the initial compliance document issued by the broker to a potential client explaining who they are dealing with and outlines an overview of what the broker does, how it makes recommendations to borrowers, lenders and products, fees and charges, commission disclosures and who they can complain to (if needed). It traditionally also provides a privacy disclosure authorization for the use of a client’s personal and financial information. This signed document is held on a borrowers file for audit if requested by an authorized party.
Credit Proposal Incorporating Preliminary Credit Assessment
This is the secondary compliance document issued by the broker to the borrower when the borrower has agreed to make application for a loan or finance product. The document includes, facts about the borrower, their requirements and objectives, what the broker has used to determine a borrower’s ability to service a loan, the borrowers monthly income and expenses, the borrowers financial position, assets and liabilities, the information about the property being refinanced or purchased, the borrowers funding position, the criteria considered when making a lender and product recommendation, any known changes to the borrowers position that could impact on their ability to repay the loan, loan product information including fees and reason as to why it was selected, a summary of any commissions paid by the lender and to whom these are paid and details of the broker who has produced the compliance document. This signed document is held on a borrowers file for audit if requested by an authorized party.
Conditional Loan Approval
A conditional approval is usually the initial approval by a lender that they are agreeing in principle to lend the applicants money following an initial assessment of a loan application. Note: the lender will need to carry out further checks before they issue their final unconditional or formal approval.
Cooling Off Period
The cooling off period is usually an agreed time in between a purchase contract being signed and the contract becoming legally binding or unconditional. During this time, borrowers traditionally ensure that their finance is formally approved, carry out any pest and or building inspections and ensure that their conveyancer reads and agrees with the loan contact and any special conditions.
Customer Ordered Valuation
Allows the customer to order a valuers report prior to applying to the lender. These reports are usually only applicable to the lender who subsidises the cost of their preparation. However, it gives the applicant confidence to proceed or withdraw without a CRA inquiry being initiated.
Debt Service Ratio (DSR)
The maximum percentage of an applicant’s wage (Monthly, Fortnightly or Weekly), which will support loan repayments over the agreed loan term. Generally, lenders set a maximum DSR between 30% to 50%.
A Deposit Bond / Guarantee acts as a substitute for the cash deposit required by the purchaser between signing a contract of sale and settlement on a property. It acts as a guarantee of the deposit payment. At settlement, the purchaser simply pays the full purchase price including the deposit.
The initial fee paid to a lender to cover basic costs in setting up a loan from initial interview to loan draw down. Not payable with some lenders, also called an Application Fee.
Fee imposed by some lenders where the borrower has sought refinance with another lender within the first few years of a loan. These fees were banned by the Australian government on 30th June 2011.
The document initially completed to collect personal and financial information from a potential client to allow the broker to establish if a borrower is eligible for a loan.
Family equity is when an family member (usually a parent) personally guarantees a loan and puts forward one of their own properties as additional loan security to assist a borrower to purchase a home. This potentially has a number of benefits like allowing borrowers (traditionally, but not limited to first home buyers) to get into the market with little if any saved deposit, avoid the need to have a genuine savings history and also avoid the need to pay sometimes thousands of dollars in lenders mortgage insurance (LMI).
The rate applied to specified period which is fixed at a rate that will not change for the duration of the fixed rate period. These are great when rates are rising but not so good when rates fall. Exit fees can be very expensive when interest rates have fallen below the rate that you fixed at.
Home Equity Loan
A home equity loan gives the borrower a revolving line of credit LOC secured by the value of the underlying asset. This allows the borrower to use the funds for other purposes at an unspecified time in the future. Lenders nowadays don’t like to approve large LOC limits for ongoing access to large cash amounts following the recent banking review by the Australian Prudential Regulation Authority (APRA).
Describes a rate applied to an Introductory Loan. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the honeymoon period the loan reverts to the standard variable rate which is often much higher and less attractive.
May be incurred in the case of an outside party being used to prepare bank documentation typically $250 per mortgage – some lenders absorb this cost.
Lenders Mortgage Insurance (LMI)
This payment insures the lender (not the borrower) for the value of the unpaid principal in the event of default. In such a case the borrower’s debt is transferred to the Mortgage Insurer. The figure depends on variables such as the loan amount, the value of the asset and the exact Loan to Value Ratio and is a one-off payment usually made at the time of settlement. This fee can sometimes be added to the loan amount being borrowed
Living expenses is a total amount requested by the lender for the purposes of loan assessment summarizing all costs of living (excluding loan repayments) including (but not limited to) Utilities and rates, Telephone, Internet, Pay TV, Groceries, Recreation and Entertainment, Clothing and Personal Care, Medical and Health, any Insurances, Transport, Education, Childcare etc.
Loan to Value Ratio (LVR)
The LVR is the ratio of the amount borrowed to the value of the property. This value does not include costs such as stamp duty. Expressed as a percentage, the ideal maximum is 80% LVR but can go as high as 97% subject to (LMI).
Loans available to applicants (generally self employed) who are unable to provide suficent documentation to meet the lenders requirements to confirm satisfactory income levels to service a loan. These loans typically carry an interest rate premium to reflect the higher risk to the lender.
National Consumer Credit Protection Act (NCCP)
Legislation that came into full effect on the 1st January 2011 – removing all previous state based regulations and licenses. The new act covers the licencing of all lenders and mortgage brokers in Australia and is administered by ASIC
Loans available to applicants who do not meet the criteria for regular lending. Typical reasons could range from impaired credit history, insufficient income or venture capital. These loans typically carry an interest rate premium to reflect the higher risk to the lender.
Offset accounts can help reduce your tax bill by offsetting taxable income from deposit accounts against interest paid in after tax dollars on mortgage repayments. However, not all offset accounts are equal, with many not paying the same interest as you are charged on your mortgage. In this case, the account would be a partial offset. The most effective offset accounts are commonly called 100% Offset Accounts, because the rate they are offset is identical to that being charged on teh loan account.
A loan feature that allows the borrower to sell a property and move to a new one without having to refinance. Such a feature saves application and legal fees. Typically, lenders insist that the loan amount remains the same or less.
Professional Pack Loan
Most lenders commonly package together a series of loan products and services and charge an annual fee for the privilege. These products usually consist of one or more of their mainstream products (variable, fixed, LOC, credit card). These products usually attract a discounted and sometime negotiated discount rate, discounted insurance, waiver of application, monthly, valuation fees or switch fees. Usually the benefits favour loans over a certain amount subject to what negotiated discount is offered.
Redraw facilities allow for withdrawal of additional repayments on a loan. A number of conditions are typically attached to the a redraw facility, which sometimes include a minimum amount and a fee every time you use it. Although there are many loans available with unlimited free redraws. Redraws are traditionally easily made from loans via the lenders online banking platform.
Is the term used to define the actual property that secures a mortgage – usually a residential building but can be cash term deposits. A mortgage can be secured by one, two or more securities.
Lenders assess each applicant individual on their ability to service the loan. There are significant differences between lenders in this area and it pays to use a home loan broker familiar with serviceability requirements before an application is submitted.
Standard Variable Rate
The rate which lenders apply to their ‘premium’ home loan product. Carries features such as a redraw facility, portability, salary and/or offset accounts. However, this is considered a starting point from which discounts should apply. Very few people ever pay the full standard variable rate.
The lender may impose a switching fee where an existing borrower wishes to change from one loan type to another e.g. Variable Rate Loan to Fixed Rate Loan
Unconditional / Formal Approval
This is the lenders final and full approval to lend a borrower monies as requested in the loan application. This follows all lenders checks including income, credit checks and valuations. Once a formal or unconditional approval is issued, the lender will then instruct their solicitors to prepare and send their offer to lend money and mortgage documents.
Fee which may be charged if the lender seeks to cover the cost of valuing the property taken as security for the loan.
A loan where the interest rate can vary over the life of the loan. These rates are normally based on the RBA Cash Rate but at times lenders can increase or decrease their interest rate at their own discretion.