AllFinanzSolutions

Finance - Glossary of terms

 

AAPR

The average annual percentage rate (AAPR) wraps up interest payments and fees and expresses all these costs in one rate. It is designed to reflect the total annual cost to a borrower of a loan. All lenders are required to disclose this benchmark comparison rate in their advertising of home loans and personal loans from July 1, 2003.

 

Basic or 'no frills' loans

Many lenders offer a class of home loan which has a lower variable interest rate than their standard variable rate loan. The trade off is that these discount loans generally have less flexibility and fewer features, eg. no extra repayments can be made, the repayment level cannot be varied or no redraw is available.

 

Basic Rate

Applied to loans commonly called ‘No Frills Loans’ which are generally cheaper than Standard Variable Rate Loans but do not have features such as a redraw facility or mortgage offset.

 

Break Cost

Relates to Fixed Rate Loans where the borrower terminates the loan contract before the expiry of the fixed rate period.

 

DSR – Debt Service Ratio

Maximum of the applicants weekly, fortnightly or monthly wage which will support loan repayments over the agreed loan term. Usually expressed as a percentage – most lenders set a maximum DSR between 30% and 33%

 

Establishment Fee

Also called Application Fee. Fee which covers basic costs in setting up loan from initial interview to loan drawdown. Some lenders choose to absorb this fee.

 

Exit Fee

Fee imposed by some lenders where the borrower has sought refinance with another lender within the first few years of the loan.

 

Home Equity Loan

A home equity account gives you a revolving line of credit secured by the value of your house. This allows you to use the funds for any other purpose such as the purchase of a second property, shares or other investments. The interest rate is generally higher than a standard variable rate, and these accounts are not suitable for everyone.

 

Honeymoon Rate

Colloquial term applied to Introductory Loans. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term the loan reverts to the standard variable rate.

- Capped Rate The rate applied to Honeymoon (Introductory Loans) which is capped at a rate that will not rise above the prevailing Standard Variable Rate, but may fall.

- Fixed Rate The rate applied to Honeymoon (Introductory Loans) which is fixed at a set rate which will not change for the duration of the honeymoon rate period.

- Variable Rate The rate applied to Honeymoon (Introductory Loans) which is variable and usually set at a discount below the Standard Variable Rate.

 

Legal Fee

May be charged where an outside party is used to prepare bank documentation.

 

LVR

Loan to Value Ratio. Refers to the maximum amount lenders will approve against the value of any property taken as security for your home loan. For example if you wish to purchase a property worth $100,000 the lender may approve a loan for 80% of the property value. It will then be up to you to provide the remaining 20% plus costs (mortgage registration and stamp duty etc).

 

Mortgage Insurance (MGI)

Some lenders may provide up to 95% of funds for a loan if you agree to take out mortgage insurance (MGI). This figure is a one off payment usually made at the time of settlement. The figure is not easy to calculate being based on variables such as the loan amount, the value of your property and the exact LVR (i.e. the figure between 80% & 95%). This payment allows the lender to recoup the unpaid principal in the event of default and the borrowers debt is transferred to the Mortgage Insurer.

 

Mortgage Offset

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.

 

Portable Loans

A portable loan allows you to sell your house and move to a new one without having to refinance. This saves application and legal fees. Most lenders however insist that the loan amount is the same or less. Make sure you know the terms of your loan.

 

Redraw Facility

A redraw facility allows you to make additional repayments on your mortgage, and then have access to the additional repayments if you need to. Make sure you understand the conditions attached to the redraw facility that can include a minimum amount and a fee every time you use it.

 

Save with offset accounts

Offset accounts not only save you home loan interest, they help beat the taxman as well. Interest paid in cash to your savings account is taxable, but the same interest used to offset home loan interest is not – a tax effective way to reduce you home loan. However, to get the most from an offset account, look for accounts which offers a 'full offset', ie. offers interest at the same rate charged on your home loan. Redraw facilities and salary (all-in-one) accounts make use of your savings in much the same way.

 

Service Fee

Usually a monthly fee levied to cover bank cost of administering & maintaining the loan account i.e. fixed and variable costs such as staff, IT software / hardware

 

Standard Variable Rate

The rate which lenders apply to their ‘premium’ home loan product. Carries features such as a redraw facility, portability, salary account and mortgage offset.

 

Switching Fee

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

 

UCCC

The Uniform Consumer Credit Code – legislation to ensure uniformity amongst all credit providers. Eg. all loan contracts must now adhere to a uniform format as specified by the act. It must set out all fees and charges that the borrower (and, if required, guarantor) are liable for under the loan contract.

 

Valuation Fee

Fee which may be charged if the lender seeks to cover the cost of valuing the property taken as security for the loan.