Financial Terminology
Acceleration
The lender or credit provider (mortgagee) holds the right to
demand immediate repayment of the mortgage loan balance due to
default by the borrower (mortgagor).
Affordability Analysis
Is an assessment of the borrower’s
capacity to repay the loan. This will consist of a review of income,
available funds and liabilities. The analysis also takes into
account the price of the property and the cost likely to be incurred
to establish and maintain a property and the mortgage.
Appraisal
A valuation or Appraisal is usually conducted on the property
being offered as security. This is done by an accredited valuer
chosen by the Lender.
Appraised Value
The valuer will provide he or she’s opinion on the properties
current market value. This is usually done by viewing the
property, researching other comparable property sales in the area
and completing the necessary searches of the property.
Borrower
This is the person(s) whom is
requiring the funds and who will be responsible for the loan.
Bridging Loan
This allows you purchase a new home
while still selling your current property.
There is generally a
specified period of time allowed for you to sell your property. If
the property has not been sold within a certain period the Lender
may place your loan into default or you may have the option to apply
for an extension. This is conditional depending on the Lender.
Broker
This is an individual in the finance
industry who would be negotiating with various lenders to provide
you with the funds required. It is your broker’s job to assist you
in all aspects of the process from taking your application until the
time it settles. The broker does not lend the money themselves. The
broker may charge a brokerage fee for this service and or receives
payment from the lender they are referring the loan to. At The Edge
Home loans we do not charge our clients a brokerage fee we are paid
commissions from the Lender we refer your loan to.
Cash Flow
This is income derived by the
applicant from various sources such as salary, commissions,
investment returns, government payments etc. The Lender will assess
your cash flow to ensure there are adequate funds to cover all the
costs of the proposed loan now and in the future.
Change Frequency
To change frequency of payment would
mean to change your repayment cycle e.g. from fortnightly to weekly
or monthly to fortnightly.
Construction Loan
This loan type is for the purpose of
building a property. The loan is set up to release funds
periodically to the builder. Once a stage of construction has been
completed and checked by a valuer a release of funds is approved and
paid to the builder. Generally a construction loan consists of 6
progress payments however this can differ depending on the
construction type and the Lender used. Once construction is complete
the loan will generally convert to a standard home loan.
Contract of Sale (Purchase Contract):
This is the contract entered into between the vendor (person
selling) and the purchaser (person buying) for the sale of real
estate.
Conversion
A conversion to your credit contract
may be for various reasons such as - changing from a fixed rate to a
variable rate loan or possibly a change from Principle and Interest
repayments to Interest only. There is generally a fee for a
conversion to your original contract and this is dependant on the
Lender.
Credit Report
This is a report obtained from Baycorp
Advantage. It provides credit and identification information for
each applicant of the loan. It will identify to the Lender if there
is anything adverse regarding previous credit dealings. A credit
check is generally obtained by the Lender for all applicants of a
loan.
Default
There are various reasons a loan will
be placed into default, such as failure to make repayments on time
and or for the correct amount, failure to provide the lender with
adequate insurances required and stipulated in the credit contract.
All terms and conditions of the loan are outlined in your credit
contract failure to meet any of your obligations stated in the
contract can place your loan into default.
Delinquency
This is the failure to make a payment on time. Legal action may
be taken by the Lender and the security property can be sold to
recover the cost of the loan.
Down Payment
The difference between the amount
being borrowed and the purchase price.
Equity
The dollar amount you own in the
property – your interest in the property. If you take the market
value and minus the amount you owe on the property you are left with
the amount you actually own – your equity.
First Mortgage
A mortgagee at settlement will
register a mortgage over the security property. If there is no other
holdings over the property the mortgage will be registered in First
place therefore known as First Mortgage
Fixed Instalment
A set repayment required each payment term i.e. weekly, monthly
etc.
Fixed Rate Mortgage
A guaranteed rate to be charged to the borrower for a specific
period.
Foreclosure
A mortgagee or Lender will take legal
action in the event of default to sell the property – this is known
as Foreclosure.
Instalment
This is the periodical repayments made by the borrower to the
lender for the loan.
Interest
This is the rate charged to the
borrower by the Lender for borrowing the funds.
Interest Accrual Rate
This is the percentage rate at which the interest accrues.
Generally it is the rate used to calculate the repayment each
payment cycle.
Investor
This is the source used by the Lender to obtain funds to loan to
borrowers
Liabilities
It is the debt/commitment an applicant
has and is responsible for.
Loan
The amount of money borrowed – the principle.
Loan to Value Ratio
This is the amount of money borrowed
divided by the value or purchase price of the security property. It
is expressed as a percentage.
Market Value
The market value refects the amount a
property would sell for within a reasonable time frame. Given
current market conditions, recent sales in the area etc. a valuer
will determine this figure.
Maturity
It is the date a loan is expected to
be finalised.
Mortgage
It is a legal document registering the
right/ hold a Lender has over a property
Mortgagee
The Lender or Credit Provider.
Mortgage Insurance
This is an insurance policy protecting the Lender. If the Loan
To Value Ratio (LVR) is greater then or equal to 80% the borrower
generally pays the premium. If the LVR is less then 80% it is
generally paid by the Lender. In most cases this is a one off
payment made at settlement of the loan.
Mortgage Life Insurance
This is to protect the borrower.
Generally, if the borrower dies or is permanently disabled the debt
owed to the loan company is paid out in full by the insurance
company. In most cases this is elective and must be sought after by
the borrower wishing to obtain such protection.
Mortgagor
The person(s) appearing on the title of the security property.
Origination Fee
This is a fee charged by the Lender or originator to establish
your loan i.e. carry out necessary checks, prepare documentation,
assess your application etc
Payment Change Date
This is the date a new monthly payment takes effect. This could
be caused by various things such as a rate rise, variation to your
repayment after changing from a fixed to a variable rate or a lump
sum payment has been made to your loan and so on
Power of Attorney
A legal document allowing one person to act in the best interest
of another. This may be due to ill health or a person not being
present i.e. overseas when documents are due to be signed and so on.
Pre Approval
An approval issued by the lender or originator confirming the
loan proposal put forth is acceptable. In the pre approval it may
outline various conditions that apply before formal approval is
issued. This approval is not legally binding and not to be
considered as a legal contract. It generally outlines the basic
information of the loan i.e. security property, borrowers and
guarantors, loan amount and outstanding requirements etc
Prepayment
This is payment agreed to be the lender allowing a borrower to
make a repayment in advance of the due date.
Prepayment Penalty
If the loan does not allow a prepayment there may be a penalty
charged for such a payment unless, it was otherwise agreed to by the
Lender.
Principal
It is the amount of your repayment
that reduces your balance. It may also be referred to the amount you
owe.
Principal Balance
It is the amount of money you currently owe on your loan not
taking into account any interest owed or charges that might be
incurred.
Real Estate Agent
An individual qualified and licensed to negotiate the sale of
real estate. They work on behalf of the vendor (seller).
Refinance
It is the taking over of a current
loan and establishment of a new loan by a different lender.
Second Mortgage
It is a mortgage registered in second
place to lender already holding the property as security The first
mortgage lender will be paid out first in the event of the property
being sold as they hold first interest in the property.
Security
Is the property being offered and taken by the Lender as
collateral for the loan
Servicing
This is all functions required to be
carried out by the Lender or Originator to ensure the loan is in
order throughout its term. It provides the borrower with the loan
servicing or customer support required and all general maintenance
of the loan to ensure the term and conditions of the contract are
upheld.
Settlement
This is when the transaction becomes complete. In the case of a
purchase it is where prior arranges meeting takes place with the
buyer, seller, solicitor and lender or their agents where the
property and funds legally change hands this may also be called
Closing. Settlement costs will vary between lenders and solicitors
used in the transaction.
Settlement Costs
These are expenses on top of the purchase price or refinancing
amount. These costs are charged to the borrower for various reasons
such as – establishment / application fee, Lenders Mortgage
insurance, valuation fee(s), Lenders legal fees, government charges
including stamp duty, registration of the mortgage(s), title search
fee(s) and so on. All fees charges are to be fully disclosed in the
credit contract you are entering.
Survey
This is a document issued by a
registered surveyor noting the dimensions, location, and reference
to any known points etc of the property in mention. A survey report
fee is charged to have this report provided.
Title
A legal document evidencing the ownership of a property
Title Insurance
This insurance policy is issued by a
Title insurance company. It guarantees the home owner or buyer
against any errors incurred in the title search or title issued.
Title Search
A check conducted to evidence who is the legal owner of a
property. It will also confirm the correct title particulars and
show if there are any holds over the property.
Underwriting
Is the assessment based on assets and
liabilities, employment, security etc and weighing up of the risks
associated with lending a certain loan amount to the applicant(s).
It is the decision making process.
Variable Rate Mortgage
A rate that can move up and down during a loan term. It is
generally guided by moves made by The Reserve Bank on interest
rates.
Verification of Deposit
Proof provided generally in the form
of a bank statement evidencing the applicant has the funds to cover
the cost of the deposit.
Verification of
Employment
Proof provided to confirm employment details of each applicant.
This can be in many forms depending on each lender e.g. recent
payslips, payment summary, tax return, tax assessment, letter of
employment etc.
It should be noted that the
above meanings are to be use as a guide only. Individual Lenders and
Originators may differ in the meaning or explanation of certain
phrases or wording. If you are unsure of any terminology in your
application form, approval letter or credit contract you should
discuss it with the chosen Lender, Broker and or your solicitor or
conveyancer.
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