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Home Loan Terminology

The world of lending is full of specific words and terminology. We'll try and simplify the meaning of these terms for you.

Home Loans

'Low doc' loans Low-doc or low documentation loans are structured for the self-employed who don't have the documentation required to get traditional home loans. The interest rate is higher than the standard variable rate although the gap is narrowing. Other types of non-conforming loans are also on the rise to cater for people with riskier borrowing profiles. They accordingly pay higher interest rates. Both types of low-doc loans generally carry a requirement for mortgage insurance, adding to their cost.

Reverse mortgage

These loans are for retired people who own their own home but have little cash to live on. Such a loan allows the 'cash poor, asset rich' to borrow against the value of their home and access the value in it without having to sell it. No repayments are required during the loan term with the total interest, fees and charges being taken out of the estate on the borrower's death.

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 must disclose this benchmark rate in their advertising of home loans and personal loans from July 2003. In Australia, the AAPR is officially called the 'Comparison Rate'. See 'Comparison Rate' for details on how this is calculated.

Annual fee

Ongoing administration fee charged each year on many home, business, personal and reverse mortgage loans, as well as credit cards. Admin fees such as these on home and personal loans can also be charged monthly, quarterly or half yearly.

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 Costs

Relates to the penalty fees charged when a borrower terminates a fixed-rate loan contract before the expiry of the fixed-rate period.

Comparison rate

All lenders must disclose a benchmark comparison rate in their advertising of home loans and personal loans since July 2003. This Comparison Rate is designed to reflect the total annual cost to a borrower of a loan. It wraps up interest payments and fees and expresses all these costs in one rate, or the average annual percentage rate (AAPR). On the Infochoice website, to make comparisons between products easier, the comparison rates displayed in tables are based on uniform amounts and terms:

Home loan Comparison Rates are based on a loan amount of $150,000 and a term of 25 years.

Personal loan Comparison Rates vary depending on the rate type and term: Variable - Comparison rates based on $30,000 over 5 years

  • Yr Fixed - Comparison rates based on $1,500 over 1 year
  • Yrs Fixed - Comparison rates based on $5,000 over 2 years
  • Yrs Fixed - Comparison rates based on $10,000 over 3 years
  • Yrs Fixed - Comparison rates based on $20,000 over 4 years
  • Yrs Fixed - Comparison rates based on $30,000 over 5 years
  • Yrs Fixed - Comparison rates based on $40,000 over 6 years
  • Yrs Fixed - Comparison rates based on $50,000 over 7 years

Discharge fee

The one-off fee charged on final payout of loan.

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 Rates

Honeymoon or introductory rates are offered to entice borrowers with a low advertised rate that may be up to 2 percentage points below the standard home loan rate and therefore look very attractive. The rate can be fixed, capped or variable for the first six to 12 months of the loan. Then they automatically revert to the standard rate offered by that lender. Use the 'comparison rate' to help choose and compare loans, not the intro rate.

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). On reverse mortgages, LVRs rise with age

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.

Non-conforming loans

So called 'non-conforming' finance refers to loans that cater for those who can't meet the standard income verification and credit history criteria mainstream lenders like banks and mortgage originators use for ordinary borrowers. Such borrowers include those who are self-employed, have a poor credit record or who have recently arrived in Australia. Non-conforming loans are usually at higher interest rates to reflect higher risk of these borrowers. the Non-conforming finance is also called 'sub-prime lending'.

Official Cash Rate

The Official Cash Rate is the interest rate set by the Reserve Bank of Australia and used to influence the general level of interest rates in banking and the economy. Changes to the cash rate, also termed "official interest rates", flow on to variable home loan, personal loan and credit card rates within weeks. See RateWatch

Offset account/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/Portability

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.

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.

Sub-prime lending

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

Sub-prime lending

'Sub-prime lending', also called 'non-conforming' loans, refers to loans that cater for those who can't meet the standard income verification and credit history criteria mainstream lenders like banks and mortgage originators use for ordinary borrowers. Such borrowers include those who are self-employed, have a poor credit record or who have recently arrived in Australia. Non-conforming loans are usually at higher interest rates to reflect higher risk of these borrowers.Sub

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

Uniform Consumer Credit Code (UCCC)

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

Uniform Consumer Credit Code (UCCC)

The Uniform Consumer Credit Code is legislation to ensure uniformity amongst all credit providers across all Australian states. For example, 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, revaluation fee

Fee which may be charged if the lender seeks to cover the cost of valuing the property taken as security for the loan. Under a reverse mortgage, some lenders may require revaluations during the term of the loan to monitor their loan-to-valuation exposure.