Finance Definitions
What do all the phrases mean? If you're apply for a mortgage or home
loan then it might be helpful to get up on the lingo!
If you don't know your TLA from your elbow then check out these useful
finance and loan related definitions.
Other definitions you might want to know about:
Broker - either a mortgage broker or a finance broker
Someone who identifies, and places, customers requiring a loan
or mortgage etc. with a company (Lender) able to provide it. The broker
often carries out the administration to do with processing the loan.
Capped Rate
Usually for a set number of months/years where the interest rate can
go up and down but there is a maximum (capped) interest rate which
it can not go above.
Contract of Sale
(Referred to as the "Contract"): A legal document which sets
out the terms and conditions the seller and the buyer enter into when
a sale is to take place - the contract contains a description of the
property - see conveyancing for more info on what is in this contract
Covenant
An agreement by one party to adhere to certain terms, conditions or restrictions
regarding a property. A covenant is not usually valid unless noted
on the title to the land. The nature of the covenant should always
be established and the question asked: What effect will this covenant
have upon the future plans for the property?
These might restrict home working, parking of cars on certain parts
of the property or restrictions on change in use of the building.
Credit score
The process of using specialised online credit search databases to identify
an applicant’s credit status.
Deposit
A deposit is normally paid by the buyer at the time of exchanging contracts;
normally 10% of the total purchase price. Any amount paid earlier as
an initial or part deposit will usually form part of the 10%.
Deposit Guarantee Bond
A written guarantee from an insurance company on behalf of the buyer
to the seller guaranteeing payment of all or part of the deposit.
Disbursements
Miscellaneous fees and charges incurred during the conveyancing process,
including search fees charged by Government authorities.
Duty
A state government tax on financial transactions. For the sale of real
estate, it is calculated according to the sale value. It also applies
to the mortgage.
Exchange of Contracts
Agreement signed by purchaser and vendor committing themselves to the
transaction. Once this has occurred a legally binding contract is in
existence and the purchaser must complete the purchase within a specific
period of time.
Fixed Rate
The rate is fixed for a specific number of years, so you know what your
payments will be over that period. Following this period, the rate
will usually revert to the lender's standard variable rate.
Freehold
Land / Property is owned outright by the Freeholder. Whether the property
is held on a lease or a freehold basis will be identified in the deeds
to the property.
Guarantor
A promise or legal undertaking given by one person (the guarantor) to
another (the creditor) whereby the guarantor agrees to pay the debt
if the principal debtor defaults.
Honeymoon rate: a rate applied only at the start of the loan.
Land / Property is owned outright by the Freeholder. Whether the property
is held on a lease or a freehold basis will be identified in the deeds
to the property.
IFA
Independent Financial Advisor.
Interest Only Mortgage
With this type of product, your monthly repayments will only cover the
interest element of the loan. You will typically set up another repayment
vehicle eg an endowment or ISA to repay the capital element of the
loan.
IVA's
Individual Voluntary Arrangements.
Joint Tenants
Joint tenancy is the holding of property by two or more persons in equal
shares. If one person dies, his/her share passes to the survivor.
Leasehold
A leaseholder holds the title to land only for a finite term i.e. the
length of the lease upon payment of a consideration e.g. rent.
Lender
The actual company that provides the finance to satisfy a loan or mortgage
request.
LMI
Lenders Mortgage Insurance. An insurance policy designed to make good
any shortfall between the amount owed on a mortgage and the value of
the mortgaged property. Provides a benefit to the lender in the event
of repossession resulting from non-payment.
Negative Equity
The situation where the amount owed on a mortgage exceeds the value of
the property.
No Insurance
Insurance is offered to provide peace of mind against life's unexpected
problems which invariably occur. Selecting "No insurance" means
that you are choosing not to protect your proposed loan repayment in
the event of you being unable to work due to an accident, sickness
or redundancy.
Non Conforming Lender
Mortgagee who assists those unable to borrow money secured on a property
from a normal lending source.
Offer of Advance
Sometimes informally known as a mortgage offer. This document details
the terms and conditions upon which the lender is prepared to make
a mortgage loan. The applicant must sign and return a copy of the offer
indicating their acceptance of the proposed terms.
Partnerships
Two or more persons carrying on a business in common with a view of profit.
Every partner is an agent of the firm and thus binds each and every
partner. Accordingly each partner is jointly and severally liable for
all of the debts not just their percentage share. The firm is not a
separate legal entity and therefore cannot enter into any contractual
obligations and the each member (partners) is principal and agent of
the others
Personal loan
A loan based on a consumer's income, debt and credit history.
Principal
The amount of money owed to a lending authority
Private Sale
The seller does not engage an estate agent but acts for himself or herself.
The seller deals directly with the buyer.
Private Treaty Sale
Sale of property through an estate agent by private negotiation and contract.
Processing
The administration and paperwork related to a loan from the time a completed
application form is received through to completion of the loan process.
Real Property
Land with or without improvements thereon.
Redemption Penalties
When a loan is redeemed (paid off) early, either in full or in part,
many lenders will charge a fee. This particularly applies to Fixed,
Discounted or Capped rate loans or mortgages.
Remortgage
Loan taken out by a borrower to replace another one secured on the same
property. Typically taken out by borrowers switching lenders to achieve
a better rate.
Repayment Mortgage
With a repayment mortgage you pay part interest and part capital repayments
to the lender each month and in this way the capital that you borrowed
is reduced until the loan is repaid.
Representatives
Local representatives (Reps) who are available, if required, to pay home
visits to help and advise in the completion of loan applications.
Search (Title)
The process of investigating or examining title to land to ascertain if
the seller has the right to transfer ownership. A title search reveals
the names of the owners and the other precise details of the property such
as the existence of any restrictive covenant, mortgage or caveat on the
title.
Second Charge
Mortgage ranking behind a first mortgage ie a second loan.
Second Mortgages
Lender who has registered a charge or mortgage directly behind that of
the first mortgages.
Secured Loan
A loan that is secured using your property.
Secured Loan
A loan to be used for any purpose. The equity in the property is put
up as security against not paying the loan back.
Security
When a loan is taken out it is ‘secured‘ on a property, the
borrower agrees to the lender creating a charge over the property; the
deed makes reference to the rights and obligations of both parties as
detailed in the Legal Charge, Standard Security or Loan Agreement. Thus
the property is known as the ‘security‘.
Security Address
When taking a secured loan or mortgage, the security address is the address
of the property which is being offered as collateral for the loan.
Where property is offered as security in this way, lenders are generally
prepared to offer more flexible terms and lower interest rates.
Self - Certified
Lenders that operate this type of scheme allow the applicant to confirm
how much they earn by "Self-certifying" their income. Schemes
are available to both employed and self employed applicants. Typically
for the employed, the schemes are designed to help those applicants
with incomes that incorporate a large element of bonus or where they
derive income from a number of jobs. Where as for self employed there
is no need for full 3 years audited accounts to be provided.
Settlement Figure
The sum quoted in order for the loan to be repaid during the contracted
term.
Sole Traders
An individual carrying on a business
Stamp Duty - Mortgage
A tax paid on the loan amount. Is payable on refinancing, however most
states provide a refund and only charge on the upstamped amount.
Stamp Duty - Property
A tax paid on the purchase of properties.
Status
The credit-worthiness or otherwise of a potential borrower.
Strata Title
Strata Title is the common method of unit (or villa or townhouse) ownership.
The relevant strata legislation makes possible the subdivision of the
airspace above the surface of the land, and the issue of a Certificate
of Title to part or parts of a building. This enables the purchaser
to buy the actual space enclosed by the unit/villa/townhouse and then
sell, lease, mortgage or otherwise deal with the lot as any other owner
of property
Structural Survey
A detailed survey of the structure of a building carried out by a Structural
Engineer or Chartered Building Surveyor. Surveyors are liable for negligence.
Sub-prime Mortgage
Mortgage granted to a person who is unable to borrow money secured on
a property from a normal lending source. The reasons the applicant
may not be granted a mortgage by a high street lender, could fall into
one of three categories:
Adverse Credit information registered against them
Existing arrears on current mortgage facilities
An inability to satisfactorily prove the level of income required by
a high street lender.
Tenants in Common
This is the holding of property by two or more persons in equal or unequal
shares. If one person dies, his/her share passes to the person named
in his/her will.
Term
Period of a loan expressed in months or years.
Title Deeds
Set of documents relevant to present and past ownership of a property.
Details names of owners and details of institutions that have registered
a charge against the property. Held by the first mortgagee whilst their
charge remains in existence
Torrens Title
Torrens Title is the name given to the Government system of recording
ownership of land. It is by far the most common land title, and the
cheapest to buy and sell. Once you are registered on the title, you
are the guaranteed owner, except in the case of fraud and trusts.
Transfer
A document registered in the Land and Property Information NSW acknowledging
the change of ownership of a property, to be noted on the Certificate
of Title.
Underwriting
The process by which the ability of a prospective borrower to repay a
loan is assessed (also the name of the department that undertakes this
work). The process takes into account various factors including employment
history, financial status, previous credit history and current earnings.
Unencumbered
Describes a property free of mortgages, covenants, restrictions, etc.
Unsecured Loan
A loan to be used for any purpose. The credit rating or financial position
of the applicant is such that no security for the loan is required.
Valuation
A brief inspection of a property for mortgage purposes. Whilst it is
for the lenders use it is often paid for by the loan applicant.
Variable Rate
A rate of interest which may vary up or down during the lifetime of a
loan. The circumstances causing any change are outlined in the loan
conditions.
Zoning
Statutory description of the allowable uses of land as set out by local
councils or planning authorities.
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