Glossary of Mortgage and Finance Terms

Finance is a world of its own, complete with its own language. Some words might sound familiar to those in the real world, but beware: they are likely to have a precise, legal definition and not be interchangeable with other, similar words.

Home-buyers are likely to encounter the following:

Application fee: The fee charged by a lender to cover or partly cover the cost of setting up or establishing the loan.

Assets: Money, property or goods that are owned.

Capital gain: The margin between what you paid for something and what you sold it for. You may then be subject to capital gains tax, which is paid on the gained amount.

Contract of sale: A written agreement outlining the terms and conditions for the purchase or sale of property.

Conveyancing: The legal process for the transferal of ownership of real estate.

Disbursements: A solicitor's incidental costs involved when dealing with a client on behalf of a lender. Includes. searches, certificates, pest reports, etc.

Draw down: The act of transferring money from the lending institution to the borrower after the loan has settled.

Debt service ratio: The ratio used by some lenders when assessing the borrower's serviceability of a loan. Essentially, it means the proportion of your after-tax income that would go in loan repayments.

Equity: The financial interest a person has in a property or business enterprise. The equity you have in your home, for example, is the difference between its market value and the amount you still owe to the lender.

Exchange: The point in time when the seller and the buyer exchange the signed contracts to carry out settlement on the sale of property.

Guarantor: A person or people who agree to be responsible for the payment of the purchaser's debts should that purchaser fail to repay them.

Loan to value ratio (LVR): The ratio of the amount lent to the valuation of the property expressed as a percentage. If, for example, the property is valued at $100,000 and the loan being sought is $80,000 the LVR is 80%. Lenders rarely lend above a set LVR.

Maturity: The date by which a debt or investment must be paid in full.

Mortgage: A form of security for a loan, usually taken over real estate. The lender has the right to take the real estate if the borrower fails to repay the loan.

Mortgagee: The lender of funds.

Mortgagor: The person borrowing money in terms of the mortgage.

Negative gearing: Structuring your investments so the cost to maintain them (loan repayments, council rates, etc) outweigh the income produced by the investment, leading to a reduction in taxable income.

Portability: When a new property can be used as security for an existing loan (i.e. when an existing loan is transferred to a new property without needing to repay the loan, reapply or restructure).

Principal: The capital sum borrowed, on which interest is paid during the term of the loan.

Redraw: The borrower is able to draw on pre-paid funds from the loan account.

Refinancing: To replace or extend an existing loan with funds from the same or another lender.

Search: An examination to confirm the vendor has the right to sell the property and there are no encumbrances on the property.

Security: An asset that guarantees the lender their borrowings until the loan is repaid in full. Usually the property is offered to secure the loan.

Settlement: The finalisation of payment by the buyer to complete the sale and then take possession of the property.

Valuation: A report detailing a professional opinion on the property's market value.

Variation: Changing any part of the original loan contract.

Vendor: A person selling a property who is the current owner.

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