Vida means ‘life’ and for us, we believe in supporting our clients achieve their life goals and being there throughout their life journey. This is our ultimate life’s mission. At Vida, we believe life is worth the investment.
Our clients often come to us with many questions of various complexities and not to our surprise, most of them are in regards to terms and conditions. This is why we have created a vocabulary list in order to assist clients with some terms they are unfamiliar with. If you have any more questions regarding other terminology, please don’t hesitate to contact us. Remember there is no such thing is a silly question!
Let’s find some common terms and their life definition below.
And for our valued Vietnamese and Filipino speaking clients, we have all the definitions translated for you in PDF!
The Australian Prudential Regulation Authority (APRA) manages all lenders, banks, credit unions, building societies, general insurers, life insurers, private health insurers, reinsurance companies and most members of the superannuation industry in Australia.
The Australian Securities and Investment Commission (ASIC) is an independent Australian government body that regulates financial services, markets and companies and enforces laws to protect consumers, investors and creditors. They ensure that markets inspire consumer trust and confidence through fair, orderly and transparent markets.
“Assessment” or “credit assessment” is simply the process that prospective lenders take to review your loan application and determine if they will lend you money.
The Australian Credit Licence (ACL) is required for anyone who engages in credit activities in Australia, unless they are authorized to engage in those credit activities as a representative of the credit licensee. These are issued by the Australian Securities and Investment Commission (ASIC).
In the case that you are going to buy a new property before your old property is sold, bridging finance is a loan that can allow you to do this.
Bridging finance also helps when your settlement dates do not line up and you have different mortgages to pay at the same time.
Cash flow refers to the money that is transferring in and out of your business or personal accounts. It includes everything you earn, spend, save and invest.
When used in finance, this term relates to all the financial lifestyle questions your lender will ask during the loan process. They may include questions regarding:
- Your income
- Your borrow history
- Your living expenses
- Your existing debt
- Occupation and employment history
- Credit score
- Savings history
Based on this data, the lender will add all your income together including salary, investments and rental income and minus all your existing debts as well as the new loan you are applying for to give them the Net Income Surplus (NIS) score. If your NIS is positive then they will determine that you can service the loan and will generally respond favourably.
Cashing out generally refers to accessing equity (Please see the definition of Equity). If the equity is positive from above formula, the lenders will allow borrowers to do “cash out”.
If your home is worth $500,000
And you still owe $200,000
You could have up to $300,000
The action of taking $300,000 cash out is also called “Unlock the equity”. Your equity will increase overtime if you pay down your home loan while the property value grows up. However, many lenders have different values that they will let you ‘cash out’.
Notes: Anything you re-borrow or cash out must be repaid. If you are borrowing up to 80% of the property value then you may not need to show evidence of what you are using the cash for, you just provide a statement of intent. If you are borrowing up to 90% of the property value then the lender will require you to provide evidence of what you are using the funds for (e.g. renovation, investment or debt consolidation).
In some special circumstances, a lender may consider offering a line of credit if certain criteria or documentation requests are met. This may include providing additional payslips, confirmation of employment or even a valuation on the property you are requesting the loan for.
A Conveyancer is a person who deals specifically with property transactions that may include checking contracts, transferring titles, booking settlements and ensuring disbursements. During transactions, both the purchaser and the vendor are required to have a Conveyancer (also called Solicitor).
In Australia, those who engage in credit activities, such as mortgage brokers, must provide their clients with a credit guide. This guide includes their licencing information and their dispute resolution process, among other important details of the relationship. This helps to ensure transparency between parties.
Each lender will have a set of criteria they must follow when assessing loans. This is called their credit policy. It gives guidance to the credit assessors around what criteria an applicant must meet for their loan to be approved, which streamlines processes and ensures equal opportunity for all applicants.
Credit policy covers a wide range of factors including employment (e.g. what sources of income will be accepted) and where you live (e.g. if you are living overseas and investing here, or are an expat), among others.
A credit representative is an individual or company that is appointed to operate as a representative under an Australian Credit Licence (ACL).
A deposit refers to the amount of money you initially put down on the property you have purchased. Usually, it is required to deposit 10%-20% of the purchase value of the property. For example, if you are buying a home worth $300,000 and want to borrow 80% of the property value then you would need a deposit of $60,000 (this means you also avoid paying Lenders Mortgage Insurance).
A deposit bond acts as a guarantee to the vendor that the purchaser can provide a deposit on the property they are purchasing. Typically, a deposit bond will be used when someone cannot provide their deposit upfront (usually around 10% of the total property value). A deposit bond usually occurs when the deposit amount is tied up in investments or term deposits that have not yet matured, when they are waiting to sell another property, or are waiting on a cash gift.
Equity refers to the difference between what you owe (or the principal of your home loan) and what the property is currently valued at.
This is calculated using the following formula: Equity = Principle of your home loan (what you owe) – current property value
If this figure is positive, then the difference is referred to as equity. Many people tend to use the equity in their property to purchase another property or for investment. If an owner can sell the house, this house is also called equity even if it is a not a mortgaged property.
A person or business (like Vida Financial) that compares a range of different finance products (such as home loans, construction loans, business loans, personal loans or car finance) for their clients. A broker acts as a guide and liaison during the whole process of the loans.
FIRST HOME BUYER (FHB)
Anyone who purchases a property to live in for the first time and has no other properties would be considered a first home buyer.
FIRST HOME OWNER GRANT (FHOG)
A First Home Owner Grant (FHOG) is a concession, grant or rebate available for First Home Buyers introduced in 2000. It is designed to help offset the Goods and Services Tax (GST) payable—calculated as the difference between output tax and input tax. Check your individual State Revenue Office for qualification criteria.
A fixed rate is a home loan interest rate that does not change for a set period of time (e.g. 2 years) and can apply to all or part of the loan. When the banks change their interest rates, the fixed part of your home loan will not change. These rates are usually higher than variable rates; however, they offer added security that you know what your repayment will be each month. The downside could be that if interest rates drop, your fixed rate will not drop.
A guarantor is any person who uses the equity from their own property as security against the loan being taking out.
An interest only home loan refers to a loan in which you are only required to repay on the interest charged, rather than on the principal of the loan.
Your interest rate is the percentage (%) of interest that is charged on your home loan that you must pay with each repayment.
Purchasing a property that you expect or hope to receive a positive financial return at some stage in the future is an investment property. It is not a property that is generally to be lived in or to make it your home, although any property purchase is theoretically an investment in your future wealth.
Investor is the purchaser who buy the investment property (Please see the definition of Investment Property)
LENDERS MORTGAGE INSURANCE (LMI)
If you have a Loan Value Ratio (LVR) of 80% or greater, then you will be required to pay Lenders Mortgage Insurance (LMI). This insurance protects the lender in the event that the borrower defaults on the loan and selling the property doesn’t recover the lenders costs. LMI does not protect the borrower.
LOAN VALUE RATIO (LVR)
A Loan Value Ratio (LVR) refers to how much you are borrowing from the bank against the value of your property. For instance, if you buy a property worth $600,000 and borrow $480,000 to buy it, then your LVR is 80%.
Low-doc loans are primarily designed for self-employed people, and as the name implies, have lower documentation requirements then a regular loan. The trade off is that these loans usually carry a higher interest rate, as the lender perceives these to be higher risk loans as they have not been able to see your full financial and cash-flow position.
A mortgage broker is an individual or a business that compares a range of different home loan products to help their clients find the product they feel is best suited.
An offset account is a bank account that is linked to your home loan.
For example: For every $1 you have in the account, the lender will offset this against your mortgage. This means they are calculating your interest rate on the principal minus whatever is in your offset account.
A property you are buying to live in or currently own and are living in.
A pre-approval is issued after a lender completes a preliminary assessment of your serviceability. The lender will indicate what they would lend to you based on your current circumstances. This means you can bid at auction or make an offer knowing what you can borrow. Once you have purchased you can convert your pre-approval to a full loan application.
PRINCIPAL & INTEREST
A principal and interest loan means you are paying both the interest and the principal on the home loan. This means you will be reducing how much you owe the bank each month (in other words, you are paying down your principal).
You may have a redraw facility attached to your home loan that allows you to withdraw any extra payments you have made on your loan.
Refinancing is the process of moving your loan from one lender to another, typically for a lower interest or improved product features that will ultimately save money on the loan.
Reinvesting refers to when a person is renting the home they live in, but owns an investment property they are renting to someone else.
This is the document provided by the vendor selling a property to a potential purchaser. This is required to be given to the purchaser before they buy the property (or make an offer). It’s a great idea to get a conveyancer to check this for you. Factors outlined in the Section 32 include finance terms (whether your offer is subject to finance or not), how long the settlement is (30, 60 or 90 days are common), who the person selling the property is (it’s good to check that they are entitled to sell the property) and more.
Security refers to the property that the loan you apply for is held against. If you have a guarantor there is a primary security (the property you are purchasing) and a secondary security (the property of your guarantor).
Settlement is the process of property being transferred from vendor to purchaser. This includes transferring titles, paying rates and water, paying the vendor the balance owed on the property and is usually when interest begins being calculated and your home loan repayments begin.
Stamp duty is tax paid to the state government (each state has a different calculation) when you purchase a property.
Switching loans mean you change the type of loan you have at your current lender. For example, switching from Variable to Fixed-rate loan.
Unconditional or formal approval occurs when the lender is confident you have satisfied all of their requirements and they are going to lend you money for your property purchase. This is the step prior to loan document signing and settlement, when the loan is actually drawn down and your repayments commence.
All lenders will require an independent valuation on the property you are purchasing. This ensures they are not lending you more than the property is valued for and helps inform what the Loan Value Ratio (LVR) is.
A variable rate is a home loan interest rate that is subject to change each month (this could go up or down) and can apply to all or part of the loan. If the banks change their interest rates then your variable rate will be affected.
Is there a term that’s not in our Vida Vocabulary? Tell our team by sending us an email [email protected] because you may be able to help others who aren’t aware of the term. Thank you in advance!
This page provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.