Your complete A-Z Guide to Home Loan Terminology

Additional Payment Caps – initial, periodic repayment caps which limit how much and how frequently fixed mortgage repayments can be made. Dependent on Lender policy.

Agreed Commission Payment Period – rebate payment frequency that loansHub Pty Ltd reimburses the client, default is set annually.

Amortisation – the way a loan is paid off over time in installments, detailing how much goes toward interest, and how much is paid toward principal.

Borrower contribution – an upfront payment made by the home buyer toward the property purchase price, usually ranging from five to 20 percent and dependent on loan purpose & security. The remainder is made up by the mortgage loan amount borrowed less the cost associated with the purchase i.e. stamp duty etc.

Bridging Loan – a short term loan, no greater than 12 months, taken out against one property to finance the purchase of a new property.

Capacity – Also referred to as serviceability, it’s the borrower’s ability to pay the mortgage repayment over the life of the loan. The lender takes into consideration the borrower’s income and expense plus any short-term financial changes stated by the borrower when working out serviceability.

Cashback Home Refinance Offer – a refinance transaction in which the bank or broker pays the borrower sufficient cashback to cover settlement costs. Funds are credited into borrowers account, typically 1 – 3 months after settlement has occurred.

Cash-In – in a refinance or purchase transaction where borrowers contribute money to lower their mortgage balance or amount borrowed on settlement

Collateral Requirements – the amount of verifiable assets you need to qualify for a given mortgage type.

Combo Loan – a first and second mortgage used concurrently to finance a property. Mainstream lenders do not allow a second mortgage to be taken usually.

Construction Loan – a short-term loan given to a borrower during intervals of the building process which is due upon completion of the project. The loan is typically interest only basis during the construction stage and the lender controls payments over the different stages of the build. On completion of the build, the loan is changed to one of the lenders standard home loans.

Credit Report – used by the bank or lender to review your credit profile and your ability to carry and repay debt.

Credit Score – a number that is used by lenders to assess your creditworthiness. There are minimum scores for most home loan borrower to qualify for a loan. With introduction of positive credit reporting in Australia, customers past and current repayment history will impact a borrower’s credit score.

Customer contribution – the total amount of money that must be paid to finalise your loan, including lender fees and third-party charges, along with stamp duty and transfer fees.

Debt-to-Income Ratio – the ratio of monthly liabilities and housing expenses divided by the monthly gross income of the borrower.

Deferred Interest – the amount of interest added to the principal loan balance when a borrower pays less than the interest-only note rate (typically applied where a borrower has applied for payment pause due to hardship or change in financial situation). Lender specific policy and allowance applies.

Delinquency – the failure to make a mortgage payment on time (at agreed frequency), which can eventually lead to a notice of default, and later a foreclosure.

Discount Rate – the interest rates the bank offers to borrower off their standard variable rate (SVR).

Deposit Money – a deposit paid to the seller by the buyer as a pledge to complete a real estate transaction. If the seller accepts the offer, the deposit is held in escrow and applied to closing costs when the deal is closed.

Document sign up – the final step in the loan process before settlement when loan documents are signed at a conveyancer or bank branch.

Encumbrance – a security instrument between the borrower and the lender, recorded in public records as a lien on the subject property.

Escrow – a third party intermediary who holds and allocates funds, including taxes and insurance in a mortgage transaction. Typically, a Real Estate or Solicitor Trust Account.

Fast Refinance – an expedited refinance that requires limited underwriting, and may even forego the need for an appraisal. This service is not offered by all lenders as it requires them to payout the existing lender before taking a mortgage on the refi property.

First-Time Home Buyer – typically defined as someone who has not owned another property at any time during their residency in Australia.

Fixed-Rate Mortgage – a mortgage with a constant interest rate that will not adjust at any point during the agreed fixed period of the loan. Fixed term varies from 1 – 10 years, depending of lender.

Fixed Mortgage Rate Break Fee – Cost payable to the lender by the borrower for changing the terms of a loan during a fixed period. Fee charged is suppose to match the loss of interest income the bank has incurred from the break.

Foreclosure – the legal process by which a bank or lender sells a property after a borrower fails to meet the repayment terms of the loan.

Gift Letter – a letter required by the borrower when using gift funds to obtain a mortgage loan, funds are typically gifted by immediate family and are required to be non-refundable.

Guarantor - A guarantor is another person (such as a parent) puttings up a property they own (or have equity in) as security, allowing the borrower to borrow typically up to 100% of the purchase price of a home without needing a deposit and is used by some borrowers to avoid paying LMI cost. In the event the borrower fails to meet repayments, the lender will seek repayment to be met by the guarantor as such, legal advice is recommended to understand the full extend of their responsibility as a guarantor.

Health/ Medical Professional Mortgage – a mortgage designed specifically for a physician that may allow financing of a property to up to 90% of its value without Lender Mortgage Insurance (LMI) being charged. Offered by specific lenders and subject to their LMI waiver policy.

HEM – standardized monthly household expense Index, where all cost involved for running the household as well as cost of living for the borrowers are charted against their income level. The lender will apply higher of the two when comparing borrower completed household budget against the HEM.

Home Insurance – insurance which protects a property owner from theft and damages caused by fire or severe weather as per insured events of the particular policy.

Home Real Estate Market Appraisal – a comprehensive report that determines the value of your property based on a number of valuation factors, different from a bank valuation report.

Home Equity – the value of a property less any and all existing liens. If a borrower owns a property worth $500,000 and has liens of $400,000, equity is $100,000.

Home Equity Line of Credit – a line of credit that uses the value of a property as collateral. Repayment is only due on the amount drawn down and used and is typically Interest only basis.

Interest-Only Mortgage – a home loan that lets you pay just the interest portion of the mortgage payment each month.

Investment Property – a property that you do not occupy, but rather rent out to a tenant.

Interest Rate Tier – the interest rates a borrower will qualify for based on the loan type, security taken and LVR at settlement of the loan.

Introductory Rate – the initial, discounted interest rate offered on adjustable-rate mortgages. On completion of the intro period the rate goes up significantly and it’s the borrower’s responsibility to refinance to a better rate.

Islamic Mortgage – a mortgage that avoids the payment or receipt of interest, which is prohibited under Islamic law. 

Late Payment – a term used in the mortgage industry to identify a late payment that is 30 days or more past due.

Lenders Mortgage Insurance (LMI) – required insurance on a mortgage if the down payment is less than twenty percent and a single loan is used to finance the property.

Lien – a claim against a property by the issuing bank or lender to secure repayment of a debt, typically in the form or a mortgage.

Loan Settlement Statement – a disclosure which details your loan summary and an estimate of the charges you’ll incur upon settlement.

Loan Comparison Rate (LCR) – the actual interest rate you pay on your mortgage, which factors in fees, charges, and other costs associated with the loan. The comparison rate is typically based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for lender specific examples. Different terms, fees or other loan amounts might result in a different comparison rate according to lenders formula.

Loan Officer – a representative of a bank or broker who originates mortgages on their behalf.

Loan Origination – the initiation of the home loan process whereby a borrower submits their information to a bank or lender in order to obtain mortgage financing.

Loan Processor – the individual who handles all the paperwork associated with assessment of your loan.

Loan-to-Value Ratio (LVR) – the percentage of the appraised property value that is borrowed from a bank or lender. A down payment of 20% would create a loan-to-value of 80%.

Low Doc Loan – income not verifiable, no tax returns completed. A Low Doc Loan is industry slang for a no doc loan, which doesn’t require income, verification.  Typically used by self-employed borrowers and lenders apply LVR restriction to cover risk taken.

Margin – a given amount specified by the bank or lender which when added to the accompanying mortgage index sets the interest rate for an adjustable-rate mortgage.

Mortgage – a loan used to finance the purchase of real property, also known as a home loan and term ranges up to 30 years.

Mortgage Broker – an independent loan originator who works on behalf of consumers to obtain mortgage financing.  Brokers don’t represent a single bank, but rather work with numerous lenders.

Mortgage Due Date – the date your mortgage payment is due each month (or the period agreed upon in the loan contract) during the loan’s duration.

Mortgagee – the issuing bank or mortgage lender.

Mortgage Lender – an institution that originates mortgage loans either to keep for interest income or sell on the secondary market. These include banks, building societies, credit unions and sub/ non-Prime lenders.

Mortgage Payment – the cost of your loan, paid at agreed contracted frequency.

Mortgage Principal – the balance of the lien(s) on a property, not including interest. What you owe on your mortgage.

Mortgage Rate – the rate of interest associated with your mortgage. Carded rate is what the lenders normally advertises in bold and regulation requires them to state the comparison rate, which includes all potential cost associated with that loan.

Mortgage Term – the length of your mortgage. Most are 30 years, though on refinancing, balance of term can also be taken if there is serviceability present (Recommended)

Mortgage Credit Underwriter – the individual who decisions your mortgage by either approving, suspending, or declining it.

Mortgagor – the borrower or homeowner.

Mortgage Contract – a written promise to repay the mortgage plus interest, which includes the name of the borrower, issuing lender, and the terms and provisions.

Mortgage Commission – a percentage of the loan amount paid by the bank to the broker for providing lending business to them. Depending on the loan type and lender, this may include an upfront and trail portion.

Negative Amortization – when a mortgage payment received is below the interest-only payment, the difference will be added onto the principal balance of the loan.

No Deposit Mortgage – a home loan that doesn’t require a down payment. This is where a developer sells the property to the buyer at below market level whilst stating the market value on the contract of sale. The borrower than uses this contract to borrower from a lender who assumes that borrower has paid a deposit to the developer already.

Payment Shock – a sudden, large increase in the contracted mortgage payment as a result of an adjustable-rate mortgage or through a refinance with new financing terms. Lenders typically move mortgage rates up faster if the RBA rate increases and decrease mortgage rates in line with RBA rate decline over an extended period, up to 3 months.

Portfolio Mortgage – a single home loan used to provide financing for multiple properties, such as rental units or other investments like shares.

Pre-Approval/Pre-Qualification – processes to determine what you can afford to ensure you can obtain mortgage financing when purchasing a property.

Prepayment Penalty – if a loan is refinanced or repaid prior to a certain date as agreed upon in the loan documents, a fee will be charged by the bank or lender.

Primary Residence – a house or property you plan to occupy the majority of the year.

Prime Rate – the interest rate offered by commercial banks to its non-credit impaired customers.

Private Lender – when an individual or private company acts as the bank or lender and carries a second mortgage on the subject property. Typically, the interest rate applied is excessive, payable monthly and loan term negotiated with the lender.

RBA Cash Rate - The cash rate is actually the interest rate charged on overnight loans between banks. The amount of interest a borrower pays on a loan is equal to this rate plus a premium (which is the banks profit and typically 2.0 to 2.5%).

Rate Lock (Fixed Home Loan) – the act of securing fixed rate of the day by paying the bank a lender a premium, percentage of the total loan amount. Where borrow does not pay a rate lock fee, the fixed rate is determined on the day of settlement.

Rebate Agreement – Term and conditions that covers Trail Commission passed on by loansHub to the borrowers

Rebate Commission – Any commission paid by loansHub back to the borrowers as part of cash-back offer

Refinance – the act of replacing your existing loan(s) with a new loan on the same property. There are two main types of refinancing, including a rate and term (product change) refinance and cash-out refinance.

Responsible Lending Act – Credit providers must not enter into a contract with you that is unsuitable, such as a loan you can’t repay without suffering hardship or a contract that doesn’t meet your requirements and objectives.

Resetting the Clock – when you refinance and extend the original loan term of your mortgage.

Reverse Mortgage – a mortgage reserved for homeowners who have retired and wish to tap their home equity without paying set mortgage payments.

Second Mortgage – a mortgage taken out behind a first mortgage, either concurrently or after the fact with another lender.

Settlement Shortfall  – when there is sufficient funds to complete settlement be it due to borrowers not taking all cost associated with the loan into consideration or valuation of the property requiring borrowers to contribute more to maintain acceptable LVR due to value being lower than estimated.

Subprime Mortgage – a home loan reserved for those who have marginal credit or difficulty qualifying for a traditional loan. Typically only considered by third party lender, as known as non-conforming lenders.

Split Mortgage – a home loan that isn’t completely Variable or Fixed, but a mix of both types make up the total borrowed.

Third Party Lending (Near or Sub Prime) – a mortgage of last resort for borrowers who can’t obtain financing in the standard market due to poor credit.

Transfer of Title Deed – a document by which a person either disclaims interest in a property or transfers interest to another person, typically at point of sale of their property.

Trail Commission - Any home loan which has been established through a mortgage broker is paid a monthly commission by the bank out of their own funds - not from the borrower's repayments excluding any administrative cost incurred.

Upfront Commission - Most mortgage brokers are small businesses or contractors so they only earn an income from the commission they receive from the lender. These commissions are calculated based on a few factors such as the loan amount, the Loan to Value Ratio (LVR), and the quality of the overall loans they write. This Commission is only paid after the loan settles

Valuation (Val) – an appraisal issued by the lenders valuation panel to determine the value of a property. The loan amount will be a ratio of the property value (LVR) and is dependent on loan purpose, security type and lender policy.

Variable-Rate Mortgage (VRM) – a mortgage with a variable interest rate, which adjusts monthly, biannually, or annually. Option-arms and hybrid mortgages are also considered adjustable-rate mortgages.