Finance Terms Made Easy: Glossary
ACCELERATED PAYMENTS / ADDITIONAL PAYMENTS
Higher repayments to pay off your mortgage faster.
Deletion of debt through regular loan repayments.
The time over which the debt is deleted through repayments.
A fee paid every year to cover the administration of the loan.
AUSTRALIAN BANKERS ASSOCIATION
The ABA is a group of bankers who work together to help create industry codes and standards, improve financial literacy and deal with policy and security, among other things.
A comparison rate is there to tell you the “true” cost of a loan so you can compare one lender with another. A comparison rate incorporates all of the upfront and ongoing fees into the repayments, not just the interest. So, even if a lender is offering a low interest rate, this may not include the administration costs and COULD mean that a lender with a higher interest rate might be cheaper in the long run, if their other costs are low. A comparison rate is a legal requirement for all lenders.
A comparison rate takes into account all of the following:
- Loan Term
- Loan Amount
- Repayment frequency
- Fees and charges
- Interest Rate
Remember. A comparison rate, while a good guide, does not necessarily tell you everything you need to know. This is because comparison rates can change depending on the size of the loan. Make sure you ask Jim!
CREDIT LIMIT INCREASE
This allows you to borrow more money against your home.
A liability that is due for payment within the next 12 months.
Release from the mortgage.
Fees paid to be released from the mortgage.
EARLY REPAYMENT FEE
A fee charged by the lender if the mortgage is paid before the agreed time.
The difference between the amount owed on your home and the home’s value.
Come into a bit of extra cash? Extra repayments are a way to pay off your home loan faster and can reduce both your principal and interest repayments.
A fixed rate is exactly that. By locking in one interest rate for the term of the loan repayments, even if interest rates go up, you’ll still be paying the same amount. However, it also means that if they go down, you’ll still be paying the same amount of interest as per the original rate. However, a fixed interest rate means you’ll always have peace of mind about how much money you need to put aside.
A percentage of the principal loan paid to the lender.
If the monthly interest isn’t paid, it is added to the principal.
An interest only loan means that you only pay off the interest on the loan. The principal on the loan remains.
Why would you want to do that?
If you are planning on buying an investment property and renovating it to sell, then you can just pay off the interest on the loan and hope to regain the principal, and more, after the sale. An interest only loan can be used to make money on a short term investment, but it can also be high risk. If property prices don’t go up, or the renovation costs run too high, you might find yourself worse off.
Make sure you ask Jim!
LENDERS MORTGAGE INSURANCE
Lenders mortgage insurance protects your lender in case you default on your loan repayments. However, LMI means that people without the usual 20% deposit can borrow money for a home loan.
A financial obligation or amount owed.
LOAN TO VALUE RATIO (LVR)
The loan to value ratio is the size of the home loan as a percentage of the property’s value. So, if you borrow $400,000 to fund a property worth $500,000, then your LVR is 80%.
The maximum LVR used to be 80%, but nowadays, it can be as high as 95% if you have lender’s mortgage insurance.
LOW DEPOSIT HOME LOAN
A low-deposit home loan allows people with low savings to get a start in the property market. The standard deposit for a home loan is 20% however, a low-deposit home loan means that number can be lower. Low-deposit home loans usually charge higher interest rates.
MORTGAGE PROTECTION INSURANCE
Mortgage protection insurance is offered by some lenders and means that in case you are sick, injured or lose your job, your mortgage repayments will be covered up to a certain amount. Of course, insurance means extra expenses, but if something were to happen, Mortgage Protection Insurance could be the best investment you’ve ever made.
An offset account allows you to reduce the interest payments on your loan. Interest payments are calculated based on the value of the loan. If your loan balance is worth $300,000, an offset account of $20,000 will mean you only pay interest on $280,000. Most lenders offer offset accounts as standard.
The base value of the loan without interest.
PRINCIPAL AND INTEREST MORTGAGE
This is a loan arrangement where each repayment helps pay off the interest and reduce the principal on the loan. This is one of the most common types of mortgage.
The redraw feature in a loan helps you reduce your interest payments, while retaining access to your money. This means that a redraw allows you to take back any additional repayments that you have made on your loan. For example, you came into some extra money and decided to get ahead on your loan repayments and reduce your interest, but now circumstances have changed and you would like to use that extra money for something else, this is when you can redraw.
A renovation loan is a loan advanced to cover the cost of home improvements.
RESERVE BANK OF AUSTRALIA
The Reserve Bank of Australia, or the RBA, conducts monetary policy and issues the nation’s currency.
If you are over 62, a reverse mortgage means you can access to the equity in your home in the form of regular cash payments. By the end of the reverse mortgage, the lender will own the equivalent portion of the house that they have paid out.
SMSF stands for ‘Self-Managed Super-Fund’. An SMSF loan is designed for people who want to invest their superannuation into property. In other words, an SMSF Loan is an investment property loan.
A loan that combines a fixed rate with a variable rate.
Switching means changing from a variable rate to a fixed rate. This can be useful if you are worried about an interest rate increase.
A variable rate is exactly that. Unlike a fixed interest rate, the interest you pay on the loan will change depending on the official interest rates set by the Reserve Bank of Australia. It can go up and it can go down.
This is a change to your home loan agreement, negotiated between you and the lender.