The following are a general explanation of the meaning of terms used in relation to loans.
Anti-money laundering and Counter-Terrorism Financing Act (AML)
Strict laws now apply to the process of identifying individuals who wish to apply for a home loan. The act also provides for triggers that must be reported where an individual displays suspicious behaviour in relation to the source of their funds.
The Australian Securities & Investment Commission administers the NCCP legislation – within this they appoint licenses and register credit representatives. They also have an active auditing role to ensure that all participants are complying with the Act.
A rate of interest generally applied to budget loans, which are less expensive than standard variable rate loans. However, such products may be offered with features such as redraw facilities for a fee and unlikely to offer mortgage offsets.
Describes the fee incurred to fixed rate loans in the case of a borrower terminating a loan contract before the expiry of the fixed rate period. These costs are not to be confused with the early exit fees that were banned by the Australian government in 2011 or discharge fees which represent the legal fees involved with finalising them mortgage.
This describes the a feature of a honeymoon. This is a rate will not rise above the prevailing standard variable rate, but may fall.
A calculated rate intended to include additional costs however often inaccurate due to the way it is used.
CRA – Credit Reference Agency
A report ordered by a lender on receipt of your loan application from one of the two main Australian credit reference agencies. This report shows previous loan applications and judgements for the past 5 years. Too many credit inquiries over the past two years can be a common cause for an application being rejected.
Customer Ordered Valuation
Allows the customer to order a valuers report prior to submitting an application to the lender. These reports are usually only applicable to the lender who subsidises the cost of their preparation. However it gives the applicant confidence to proceed or withdraw without a CRA inquiry being initiated.
Debt Service Ratio (DSR)
The maximum percentage of an applicants wage (Monthly, Fortnightly or Weekly), which will support loan repayments over the agreed loan term. Generally, lenders set a maximum DSR between 30% to 50%
The initial fee paid to a lender to cover basic costs in setting up a loan from initial interview to loan draw down. Not payable with some lenders, also called an Application Fee.
Fee imposed by some lenders where the borrower has sought refinance with another lender within the first few years of the a loan. These fees were banned by the Australian government on 30th June 2011.
The rate applied to specified period sometimes called a honeymoon, period which is fixed at a rate that will not change for the duration of the fixed rate period. These are great when rates are rising but not so good when rates fall. Exit fees can be very expensive when interest rates have fallen below the rate that you fixed at.
Home Equity Loan
A home equity account gives the borrower a revolving line of credit secured by the value of your the underlying asset. This allows the borrower to use the funds for other purposes.
Describes a rate applied to an Introductory Loan. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the honeymoon period the loan reverts to the standard variable rate.
May be incurred in the case of an outside party being used to prepare bank documentation typically $250 per mortgage – some lenders absorb this cost.
Lenders Mortgage Insurance (LMI)
This payment insures the lender for the value of the unpaid principal in the event of default. In such a case the borrowers debt is transferred to the Mortgage Insurer. The figure depends on variables such as the loan amount, the value of the asset and the exact Loan to Value Ratio and is a one-off payment usually made at the time of settlement.
Loan to Value Ratio (LVR)
Is the ratio of the amount borrowed to the value of the property. The value does not include costs such as stamp duty. Expressed as a
percentage the ideal is 80% LVR but can go higher with some lenders.
Loans available to applicants unable to meet the required income levels to service the loan. These loans typically carry an interest rate premium to reflect the higher risk to the lender.
National Consumer Credit Protection Act (NCCP)
Legislation that came into full effect on the 1st January 2011 – removing all previous state based regulations and licenses. The new act covers the licencing of all lenders and mortgage brokers in Australia and is administered by ASIC
Non Conforming Loans
Loans available to applicants who do not meet the criteria for regular lending. Typical reasons could range from impaired credit history, insufficient income or venture capital. These loans typically carry an interest rate premium to reflect the higher risk to the lender.
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. In this case, the account would be a partial offset.
A loan feature that allows the borrower to sell a property and move to a new one without having to refinance. Such a feature saves application and legal fees. Typically lenders insist that the loan amount remains the same or less.
Redraw facilities allow additional repayments on a loan, while retaining access to the additional repayments if required. A number of conditions are typically attached to the a redraw facility, which may include a minimum amount and a fee every time you use it. Although there are many loans available with unlimited free redraws.
Is the term used to define the actual property that secures a mortgage – usually a residential building but can be cash term deposits. A mortgage can be secured by one, two or more securities.
Lenders assess each applicant individual on their ability to service the loan. There are significant differences between lenders in this area and it pays to use a home loan broker familiar with serviceability requirements before an application is submitted.
Service Fee ( Admin 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 and/or offset accounts. However this is considered a starting point from which discounts should apply. Very few people ever pay the full standard variable rate.
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
Fee which may be charged if the lender seeks to cover the cost of valuing the property taken as security for the loan.
A loan whose interest rate can vary over the life of the loan. These variation are normally based on the RBA Cash Rate but at times lenders can increase or decrease their interest rate at their own discretion.