Terminology

Have you ever wondered what some of the jargon used in home ownership may mean? Here we explain some.

Appreciation is increase in value of an asset such as land.

Short term funding from a lender before arrangements by the borrower can be made for the longer term. Bridging finance is often used when buying and selling houses, to ‘bridge’ the gap between the payment of a deposit on one property and the receipt of proceeds from the sale of another. Bridging finance is generally considered a last resort because it comes at a cost for the convenience that it offers.

The legal process in transferring deeds of property from seller to buyer. The procedures may include searches of former title changes to verify the chain of ownership and the registration of the current change with the relevant government authority.

To raise money through the issuance and sale of debt and/or equity.

One who makes a guarantee or agrees to be answerable or responsible for another person’s debt. Legally, the guarantor makes a contract with the lender. If you are younger or earning a low salary, a lending institution might agree to advance you money only if someone substantially more credit worthy i.e. “guarantor”, agrees to the pay your debt if you fail to repay the loan or fulfil the obligation.

A rate which is changed or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and reserve bank policies. For example, if a lender (such as a bank) charges a customer $90 in a year on a loan of $1000, then the interest rate would be 90/1000×100%=9%.

Insurance by an independent mortgage insurance company protecting the lender against loss when the borrower defaults (i.e. does not make regular required repayments). LMI premium is paid by the borrower, however it is to protect the lender. LMI is usually applicable when money borrowed is greater than 80% of the value of securities offered.

A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.

Real property refers to land. When a lender lends money to a borrower in order to enable the borrower to purchase the land they are taking a risk that the loan will not be paid. To reduce the risk, lenders take security (usually) over the real property in the form of mortgage. If the borrower is defaulting on the repayment agreement with the lender (for example not making repayments as per agreement) then the lender can enforce sale of the property to recover the loaned amount.

Someone who has rights not only against the debtor personally, but against specific assets of the debtor which the creditor may be able to sell if that is necessary to recover the amount of the debt.

This is a system for creation of title to individual units in a block, townhouse or villas in a development. All the individual owners of units commonly hold title to the land on which the development is via the body corporate. Strata plan states the individual unit owner for each lot. Unit owners get certificate of title for their own lot.

Torrens title guarantees the title to the owner(s) as is stated in the certificate of title.

A financial instrument secured by a pool of assets such as a property, a mortgage or credit card receivables

Legally enforceable agreement between individuals or entities. In real estate an exchange of contract accompanied by payment of the deposit is a blinding commitment between buyer and seller. An employment contact guarantees remuneration, conditions and length of service.

The use of funds provided under a borrowing facility. The borrowing facility would first be organised between the lender and client (borrower), but the funds would not be used until the drawdown takes place. Once the client has used all or part of the funds, the loan is ‘drawn down’.

DVariable interest rate is the interest rate that a lender can vary at anytime as per the terms and conditions noted in the contract agreement. Usually the rate is pegged to the cash rate as determined by the Reserve Bank, however a lender can have the margin that it chooses or vary the margin at anytime. Usually extra repayments (over the minimum needed by the lender) are allowed throughout the term of the loan and it can be withdrawn (redrawn) as well. Loan can be fully paid out at any time and there is no penalty.
Fixed interest rate is constant for a specific period of time as per the terms and conditions noted in the contact agreement. Borrower is usually able to exit from the fixed term after paying the lender their costs (which includes break costs, penalty rates etc). Fixed term can be upto 10 years depending on the lender. At the end of the fixed term the rate usually reverts to variable unless some other option has been pre-arranged. Fixed rate provides ‘peace of mind’ and certainty of known repayments over the fixed term.
Split loan is a combination of variable rate and fixed rate loan. The purpose of such a loan is to get benefit from both variable and fixed rate features. It depends on the borrower based on their comfort level as to what percentage of loan is fixed or variable.

In IO loan only the interest is repaid on regular basis. Hence the principal amount does not decrease. In P&I loan repayments are calculated in such a way that when the term ends then principal amount will become zero. Hence loan is fully paid out at the end of the loan term.

In joint tenancy each tenant owns equal interest in the whole of the property. For example if 4 individuals buy 4 acres of land as joint tenants then each one owns undivided 1 acre of whole land. If one tenant dies then remaining tenants inherit automatically the deceased tenant’s interest.

A flexible loan from a bank which allows the customer access to funds over a given periods but does not entail regular fixed repayments. A line of credit is similar to an overdraft in that the amount the client chooses to use is left on his or her discretion, within the agreed limit. Banks regularly review the level of use of a line of credit; if the funds are not being used the bank may reduce or withdraw the facility since the bank expects the capital to earn a return.

Personal property includes all forms of property other than real property. It can be tangible or intangible objects. Car, boat, jewellery, fridge etc are examples of tangible object. Debts, shares etc are examples of intangible objects. It is possible for a lender to take security over a personal property. For example: car loans and margin loans.

A commitment by a lender guaranteeing a specified interest rate for a specified period of time. Also called lock-in.

A land, house, building. The term generally refers to immovable property, which can be contrasted with the personal property that goes into it, such as furniture.

In the legal sense a right against a particular asset belonging to another, for example, a lender holding security on a loan between the two parties. A creditor without security has rights only against the debtor and not against any specific property.

Tenancy in common is similar to joint tenancy but the interest in the property can be disposed of by will, gift or sale by any one tenant.

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