Amortization
The repayment of a loan through instalment payments.
Amortization Term
The agreed upon number of months or years a borrower will be making payments
to pay off an original debt.
Appraised Value
The value assigned to a property by a licensed professional to assess
its fair market value.
Bankruptcy
A debtor that is judged legally insolvent and whose remaining property
is then administered for the creditors or is distributed among them.
Bridging Finance
A loan to cover the purchase price of a new property when you still have
to sell your existing property. The security for the loan is usually over
both properties.
Consumer Reporting Agency
Also known as a bureau, a Credit Reporting Agency tracks payment history,
account activity and other relevant public records for the purposes of
determining credit worthiness of individuals. For example, Baycorp
Conditional Agreement
A Conditional Agreement is a legally binding contract, but the property
is not bought or sold until a certain condition or conditions detailed
in the Agreement have been satisfied, usually by the Purchaser (e.g. selling
your existing home by a set date or arranging mortgage finance by a certain
date). Conditions can also be included by the Purchaser requiring the
Vendor to do something by a specified date, e.g. that Settlement is to
take place only on the condition that the house is painted, the windows
repaired or that all the rubbish around the section is removed. (Note
- conditions of the second type usually do not prevent the sale taking
place but may allow the purchaser to delay settlement without penalty
or claim damages if the conditions are not met in time).
Credit History
A history of an individuals ability to pay their bills on time as well
as any other relevant public records.
Credit Report
A report outlining an individuals credit history, public records and credit
worthiness.
Debt Servicing Ratio (DSR)
The Debt Servicing Ratio measures how easily you can afford the mortgage
payments. It is the percentage of the persons income available to service
debt. The DSR is calculated in different ways by different lenders. However,
the principle is the same: they merely apply different percentages. The
equation is loan payments divided by eligible income.
Lenders generally allow 30% to 35% of your own income and 80% of your
rental income to be eligible income applied to loan payments.
Example
First calculate the debt servicing:
$10,000 + $8,000 = $18,000
Next, calculate your eligible Rental income:
$9000 x 80% = $7,200
Next, deduct rental income from debt servicing (e.g $18,000)
$18,000 - $7,200 = $10,800
Divide this figure by Gross Income
$10,800 ÷ $50,000 x 100 (to get percentage) = 21.60%
Equity
The difference between what is owed against a property and its fair market
value is the properties Equity.
Finance Rate
This is the true cost the client is paying. It takes into account not
only the interest rate, but (generally and for example), the up-front
fee paid to the lender.
First Mortgage
This is what most people think of when someone says mortgage. It is a
loan in first position against a property that is usually the balance
of the loan used to purchase a property in the first place. All other
loans against the property are subordinate to this loan.
Fixed Rate Mortgages
A type of mortgage loan usually with 30 or 15 year loan terms where the
interest rate remains constant throughout the life of the loan (anything
from 6 months through to 7 years). The advantages of a fixed rate loan
is your own security that the interest rate will not increase. The disadvantage
of a fixed rate loan occurs when interest rates substantially decline
below the interest rate of your loan. If the mortgage is discharged before
the end of the fixed rate term, there is usually an Early Repayment Penalty
incurred.
Foreclosure
Procedure whereby property pledged as security for a debt is sold to pay
the debt in the event of default in payments or terms.
Interest
What is repaid over and above the amount borrowed.
Interest Only
A loan where the amount owed remains the same and the regular payments
are made up solely of interest. At the end of the interest only period,
the amount owed is the same amount as initially borrowed. Short term interest
only loans are often called bridging finance as they usually are used
to “bridge” the period between the drawdown of loan monies
and the known future receipt of monies, generally from a property sale.
Interest Rate
A charge for a loan usually a percentage of the amount loaned.
Joint Tenancy
Joint ownership by two or more persons with right of survivorship; all
joint tenants own equal interest and have equal rights in the property.
Liability
Something for which one is liable; an obligation, responsibility, or debt.
Examples of liability would include, a mortgage payment, a tax bill, an
insurance bill, etc.
Loan Agreement
This is the document that sets out the agreed terms of repayment with
the lender.
Loan Documents
Disclosures and written agreements that are required for the closing of
a loan. Documents are the contract upon which the terms of a loan are
outlined and agreed upon.
Loan to Value Ratio (LVR)
The Loan to Value is the percentage of what is owed against the property
vs. what the properties fair market value is. . To calculate the LVR,
simply divide the loan by the value of the property. For example, the
LVR on a $100,000 property with a proposed $80,000 mortgage would be $80,000
÷ $100,000 % = 80%. (or $80,000 x 100 ÷ 100,000 = 80%)
Lock
A commitment from a lender to guarantee an interest rate for a borrower
for a period of time. Rate locks expire after an agreed upon time.
Mortgage
This is the security the lender takes over the property.
Mortgage Broker
A person who arranges mortgage loans through mortgage bankers. This person
acts as a middleman and is not limited to the restrictions of having to
go through only one lender. This person can "shop" your loan
to get you the best rate and term available.
Mortgagee
One to whom a mortgagor gives a mortgage to secure a loan or performance
of an obligation, a lender.
Mortgagor
One who gives a mortgage on his property to secure a loan or assure performance
of an obligation, a borrower.
Net Worth
Net worth is the difference between an individuals assets and liabilities.
Net worth takes into consideration all assets and liabilities liquid or
not and can be a positive or negative number.
Payment Holiday
Some lenders allow payments to be suspended for up to 3 months. These
payments, plus extra interest on these payments are added to the total
amount to be repaid.
Principal
The amount borrowed or still owed, excluding interest.
Principal Balance
The balance of the amount of the loan that is outstanding.
Priority
The First Mortgage, and all moneys secured from time to time under it,
will have first priority over the Second Mortgage and the Third Mortgage
for an amount not exceeding the First Mortgagee Priority Amount. This
figure is set by the First Mortgagee to cover all costs such as interest,
fees, bank charges, tax etc.
Revolving Credit / Redraw Facility
A revolving credit or redraw facility is basically a large overdraft facility
but based on the lenders floating rate. Interest is calculated daily on
the amount owing on that day.
Reducing Mortgage
A loan that has the same amount of principal paid off in each payment.
Every payment reduces slightly as the interest is calculated on the reducing
amount you owe (the principal). The initial repayments are usually higher
than under a table structure and less interest is paid overall in comparison
to a table structure.
Remaining Term
The time that is left before a loan is paid in full.
Second Loan (mortgage)
A second mortgage is another loan secured by the property much like a
first mortgage. It is a loan which is subordinate to the first mortgage.
Table Mortgage
A loan set up to be paid off with the same regular payment (eg fortnightly)
over the loan term.
Tenancy in Common
Ownership by two or more persons who hold undivided interest, without
right of survivorship; interests need not be equal.
Term
This is the number of years it will take the scheduled repayments to pay
off the amount borrowed. The original loan term can reduce if the repayment
amount is increased.
Top Up
Where an existing loan is in place with a lender and the client wishes
to borrow more.
Trust Deed
Just as with a mortgage, this is a legal document by which a borrower
pledges certain real property or collateral as guarantee for the repayment
of a loan.
Trustee
One who holds property in trust for another to secure the performance
of an obligation.
Unconditional Agreement
The legal contract that binds both the Purchaser and the Vendor to settle
on the agreed date at the agreed price. It is either not subject to any
conditions being satisfied or those conditions have already been satisfied.
You should only consider entering into an Unconditional Agreement if and
when you are absolutely sure you want to buy a particular property and
you already have the full purchase price or "pre-approved" loan
finance from a bank, i.e. An Unconditional Agreement commits you in all
respects to purchasing the property.
Vendor
Person selling property – Purchasee.
