Do you need home loan terms and jargon explained?
There is a lot of home loan jargon used by banks, other lenders and mortgage brokers. Often different lenders use different jargon and call the same thing a different name perhaps in an attempt to confuse the customer or maybe because of the lack of coordination between them.
Home loan terms glossary
Below is a glossary of home loan terms. Some of the Home loan terms are explained in the links.
100% Offset Account
A transaction account linked to your home loan which can help to reduce the amount of interest payable on the loan. A 100% offset account works as if the money in the offset account has paid down the loan. A partial offset account works as if part of the money in the partial offset account has paid down the loan. When money is taken out of the offset account interest increases as if the loan had increased.
Bank or Lender Deposit
The amount of equity the lender requires when taking out a home loan.
Break costs are also known as Break fees; Early repayment fees; Early repayment adjustment; Prepayment fees and economic cost; Fixed rate early termination fee or fixed rate unwind adjustment; or Early payment interest adjustment. Break costs is what your bank or other lender will charge you if you have a fixed interest rate loan and you:
• Switch to a different product
• Repay the loan in full before the end of the fixed rate term
• Make extra home loan repayments in excess of the allowable limit
• Default on the loan, requiring it to be repaid immediately
Bridging Finance or bridging loan
Short-term loan or finance that covers the period of time between the purchase of a new property and the sale of an already owned property.
An adjusted interest rate for a specific loan amount over a specific loan term that considers the lender’s interest rate, fees and charges.
A default is where you did not pay a liability by the agreed due date or an extended arranged due date. The liability could be a phone bill, electricity bill, or other bill or more seriously a loan repayment from a financial institution (bank or lender).
A guarantee given by the lender on behalf of the borrower that can be used instead of having to provide cash for the deposit when purchasing a property.
The difference between the value of your home and the amount that is owed on your home loan.
An enforceable promise by a third party to meet a borrower’s payment obligations for a loan if the borrower is unable to pay. The guarantor’s asset (property) is often used as a security.
A refundable goodwill deposit to show a buyer’s intention to purchase. This is different from the bank or lender deposit.
Home Equity Loan
A home loan which allows you to access the equity that you have in your property.
A loan where the borrower only pays the interest (instead of principal and interest) for a set period at the start of the loan. At the end of the set period the loan changes to principal and interest payments for the rest of the loan. With the approval of the lender the interest only period may be extended for another term before again changing to principal and interest payments.
Lender’s Mortgage Insurance
Paid by the borrower to the lenders mortgage insurer to cover the lender in the event that the borrower defaults on the loan and the lender is unable to recover its losses from the sale of the security property. If this happens, the lenders mortgage insurer will pursue the borrower for the losses.
Line of Credit
A transaction account that has a credit limit attached to it. A line of credit is a bit like a credit card but with home loan interest rates. The borrower can generally withdraw funds whenever they want, in any amount up to the credit limit. Interest only options are typical for this type of loan.
The length of time over which a home loan is repaid, generally 25 or 30 years. However, longer loan terms as long as 40 years are now available.
Loan to Value Ratio
The Loan to Value Ratio is the loan amount as a percentage of the property value (that is being used as the mortgage security). Lenders typically use the lower of the purchase price and the property valuation.
Mezzanine financing or mezzanine loan is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies.
A home loan is often called a mortgage. A mortgage is the legal document that secures a property against a home loan. If the borrower defaults on the home loan the mortgage give the lender the legal right to repossess the property.
A mortgage deposit is the amount of funds or equity that the borrower is contributing to the purchase of the property with the funds from the loan making up the rest of the purchase price.
A mortgage broker helps you find a loan that is suitable for your situation and objectives.
Mortgage Broker’s Commission
The commission paid by the lender to the mortgage broker for introducing and writing the loan.
Notification from the lender that they will approve your loan application under certain circumstances. There are different types of pre-approvals. Only a unconditional pre-approval guarantees that the lender will approve your loan application.
Feature of a loan that allows borrowers to re-borrow any additional repayments they have made off the loan.
A valuation of the property being used as a security for a home loan performed by a licenced valuer. For the bank to assess the value and risk using the property as a security.
Variable Interest Rate
An interest rate that varies in accordance with the rates in the marketplace.
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