Lighthouse Words
 

Like most industries, the finance industry has its own language or jargon. We have provided a glossary of the most commonly used terms in the industry to help borrowers make sense of what they are told.

Company Title

A form of property ownership for a unit within a block of units. Generally uncommon and found in some older unit blocks where the owners have not converted to strata title. Owners have shares in a company, which owns the entire building proportionate to the entitlement for their unit. Maximum LVR is quite often less than for other types of security.

Deferred Establishment Fee

A fee levied by some lenders for loans, which are paid out early in the loan term.

Economic Cost

The cost associated with breaking a fixed rate loan. Generally it's the loss incurred by the lender passed on to the borrower. There may also be a Prepayment Fee.

Fixed Rate

An interest rate which is guaranteed not to change during the fixed rate term. Terms generally range from 1 to 5 years although longer terms are available from some lenders.

Interest Only

Repayments calculated to the meet the interest cost of the loan only. Interest only terms are generally for a maximum of 5 years when the loan converts to P&I repayments or has to be renegotiated. The initial loan amount does not change during the interest only period. Interest only loans are generally used to purchase investment properties in order to preserve the

LVR

Loan to Valuation Ratio. The loan as a percentage of the purchase price or valuation of the property being used as security. Generally lenders will only lend to a maximum LVR of 95%. This percentage may differ from lender to lender based on the loan amount, the purpose of the borrowing and the type of security being offered.

P&I

Principal & interest. Refers to loans which include both principal & interest repayments. Repayments are calculated at the current interest rate to repay the loan over the agreed term. If the interest rate changes, lenders recalculate P&I repayments to ensure the loan is repaid when due.

Prepayment Fee

A fee payable to a lender when an extra/ lump sum payment is made to a fixed rate loan. An economic cost may also be payable.

Professional Package

A package of discounted, fully featured loan and transactional banking products provided by some lenders, usually for an annual fee. Qualification for packages varies from lender to lender but generally include income, loan size and employment.

Strata Title

The most commonly used form of property ownership for units.

Term

The maximum loan term for residential mortgage lending is usually either 25 or 30 years. A longer loan term reduces the repayment amount and therefore increases borrowing capacity. Borrowers may be required to reduce the loan term if the loan is not expected to be repaid before retirement and a substitute income stream is not available.


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