Mortgage Glossary

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AAPR

AAPR is the Average Annual Percentage Rate, also known as a ‘Comparison rate’. The AAPR or comparison rate reflects to true rate taking into account introductory offers, honeymoon rates, ongoing fees, and discharge fees as well as the advertised interest rate. This is then expressed as a total interest rate cost to you over an average loan term.

Keep in mind that the AAPR or ‘comparison rate’ doesn't include government fees, exit or early repayment fees and service fees like redraw and standard bank/lender fees/charges.

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Amortisation Period

It’s the agreed length of time that a borrower has to repay a loan. For home loans, the timeframe is usually around 25 to 30 years. It’s set during the application and approval process. The loan balance declines by the amount of the scheduled payment, plus the amount of any extra payment.

For example, a loan balance will reduce quicker if the owner is paying ‘Principal and Interest’ rather than just ‘Interest only’. Often an amortisation schedule is drafted to showcase how a loan is repaid over the length of the term.

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Application

A formal request for a loan that includes the information about the potential borrower, the property and the requested loan. The application form will include information about the potential borrower’s capacity to repay the loan. The information provided will help the lender decide on whether to grant the loan to the potential borrower. The lender may also ask for additional information to help them make a decision.

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Application fees

The fees a bank or lender charges to set up the loan when you apply. It’s generally to cover the lender’s internal costs. It may or may not cover other costs such as a property valuation or credit report, and it may or may not be refundable if the lender declines the loan. In some cases, lenders will offer to waive the application fee.

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Appraisal or Valuation

A written estimate by a certified valuer of a property's current market value. The appraisal will be conducted on property that loan will be held against. The valuer will take into consideration the current market, recent sales of similar properties, the condition of the property and the neighbourhood. The lender, bank or mortgage broker will organise this on behalf of the borrower. This is an important step in securing finance as the appraisal or valuation needs to reach the same level as the home loan.

For example, if a property is being purchased for $500,000 with a deposit of 10% ($50,000), but the certified valuation of the property is only $400,000 then the borrower can only borrow 90% of the $400,000. Therefore, if the bank will only lend $360,000 and you only have $50,000 for the deposit, you can’t raise enough money to buy the property at $500,000. There will be a $90,000 shortfall and you’ll have to say goodbye to the property unless you have equity in additional properties in your portfolio that you can borrow against.

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Appreciation

Don’t we all want a little appreciation? This is where the value of the property increases. For example, if you purchased a property for $400,000 10 years ago and the property is now valued at $900,000, the property has appreciated in value by $500,000 during those 10 years. Now wouldn’t that be nice!

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Approval

There are three types of approvals when it comes to a mortgage approval process. Pre-approval, conditional approval and unconditional approval.

Pre-approval is generally used when you are approved in principal for a loan amount but don’t have a specific property in mind. Pre-approvals are valid for 3 months, so even if you’re not ready to buy today, you can secure your finance in preparation. Keep in mind that only when a loan is confirmed as unconditional, the lender can still back out of the deal.

Conditional approval is generally used when you are approved but there are some outstanding items that the lender wants before granting unconditional approval. For example, you might still need to provide updated payslips.

Unconditional approval is when the bank is satisfied that you have provided all the necessary information for them to commit to lending you the money. Now you can pop the champagne cork and celebrate!

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Arrears

This is not good. It’s when you are overdue in your repayments. If a loan is described as being ‘in arrears’ it means the borrower hasn’t kept up with their required payments and there is an outstanding or overdue amount.

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Assets

Assets come in many shapes and forms, cash, property, shares or goods owned. Depending on whether you are borrowing in a personal or business capacity, assets will help provide collateral against the borrowings.

For example, in a standard home loan mortgage, the home (house or apartment) is the asset that the lender will lend against. In a business loan, the assets might be the stock and machinery.

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Auction

This is a sales process whereby the item/property is sold to the highest bidder. Auction laws may vary from state to state so discuss the legal requirements with your agent. One of the biggest considerations about buying a property at auction is signing a 66W and waiving your cooling off period. To learn more about signing a 66W, read our article The rules involved in the cooling off period.

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Break costs

Break costs refer to a penalty charge incurred for paying out a loan balance on a fixed term loan before the term has expired. For example, if you originally secured a fixed interest rate home loan for 3 years and you decide to payout the loan before the end of the 3 years, the lender will charge a penalty fee for ‘breaking’ the term.

Each lender calculates their break cost differently so you need to review your credit contract or contact the lender to find out your break costs. Break costs calculations take into consideration how much If you are considering selling your property, you should find out if a break cost applies as they can be a large economic cost for the borrower.

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Bridging finance

Bridging finance is exactly that, it’s a bridge between two loans. Usually used when a property owner has found a new home to buy, but they haven’t sold their existing home yet. A bridging loan is only a short term solution as the interest rates are usually much higher than a standard home loan and the lender will only lend you the money for short amount of time. You’re also paying two home loans at the same time, so you don’t want that to continue for too long. 

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Building inspection

An inspection carried out prior to the purchase of a property to make sure the building is structurally sound and to assess the condition of the property. Often combined with a pest inspection and referred to as a ‘Pest and Building’, the inspection is carried out by a qualified inspector and costs for a standard report are around $500. Contracts of sale can be made subject to the satisfactory building inspection if you haven’t been able to organise one before paying your holding deposit.

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Building Society

A financial institution owned by its customers or “members”. It offers banking and other financial services, particularly focussing on mortgage lending.

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Capital gain

We love capital gains! This is where the asset is sold for more than its original price. But don’t get too excited, read Capital Gains Tax below.

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Capital Gains Tax (CGT)

One of the most 'punch in the stomach' taxes there is. Capital Gains Tax or CGT is a federal tax on the monetary gain made on the sale of an asset. The tax does not apply to the gains made on the sale of an owner-occupied residence, so it generally applies only to investment properties. Speak to your accountant prior to selling to see if this tax affects you.

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Capped loan

A capped home loan is a loan with a cap on the interest rate. Different to a variable interest rate, the cap prevents the interest rate from rising above a certain specified rate. The borrower can still benefit from any decrease in the interest rate however they generally start at a higher rate than a standard variable interest rate.   

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Caveat

A caveat lodged upon a land or property title indicates that a party, that is not the owner, claims some right over or interest in the property.

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Certificate of Title

A document with all information relevant to a particular property or piece of land. A current edition of a Certificate of Title will normally detail title information including the name/s of the owner/s, the lot/plan numbers and other registered interests on the title such as mortgages, easements and covenants.

A lender usually holds this document as security. Once the loan is fully repaid, the Certificate of Title is returned to the borrower.

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Chattels

Chattels are items of personal property, such as clothing, appliances and furniture. In real estate terms chattels are usually movable items which may be included in the sale, such as furniture.

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Contract of Sale

A written agreement outlining the terms and conditions for the purchase or sale of a property. This contract needs to be prepared before the property goes on the market. Once you’ve found a property that you want to buy, ask the Real Estate agent for a copy. The contract should include;

  • Conditions of the sale, such as financing information or additional building inspections
  • The names of the vendor and purchaser
  • The property’s address
  • The amount of deposit that must be paid
  • The sale price of the property
  • The date of the property settlement
  • Whether the property will be available as a vacant possession, or if it is subject to a lease
  • Other personal property sold as part of the package deal

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Conveyancer

Licensed conveyancer or conveyancing solicitor are professionally qualified to advise in legal matters involved in the buying or selling of property or businesses. You should speak to your conveyancer before you look for a property or before you decide to put your property on the market.

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Credit

Credit is when you want to borrow money for a purchase and enter into an agreement to pay it back. There are many types of credit available for a variety of uses including credit cards, personal loans, car loans and mortgages.

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Credit Union

Similar to a building society, a credit union operates similarly to a bank, but is owned and controlled by people who use its services.

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Creditor

A person or organisation who is owed money.

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