Australian borrowers are more unsure of home loan terminology now than they were two years ago, according to a new research from Gateway Credit Union.
Gateway’s Mortgage Holder Sentiment Report 2017 has found that Australians with a mortgage are now more uncertain of what their home loan includes than they were in 2015.
The data, gained through a quantitative survey of 1,030 people conducted through an online panel from 12 to 18 September 2017, found that a fifth of respondents (20 per cent) were unsure if their current mortgage offered a redraw facility, almost a third (28 per cent) were unsure if they had an offset account and nearly half (47 per cent) were unsure if their home loan offered splits.
The findings showed a marked increase in uncertainty on home loan features, with the previous survey (in 2015) showing that 17 per cent of respondents were unsure of redraw, 18 per cent were unsure if they had an offset and just 35 per cent were uncertain over splits.
More alarmingly, the research went on to reveal that borrowers also struggled when it came to understanding common home loan terms.
Forty per cent of borrowers did not understand the term “split home loan” (up from 28 per cent in 2015), 32 per cent did not understand the difference between interest rate and comparison rate (up from 21 per cent two years ago), while 18 per cent did not comprehend the term “offset account” and 14 per cent did not understand “redraw facility” (up from 13 per cent and 10 per cent, respectively).
Gateway chief customer officer Lexi Airey said that the current expectation that interest rates will increase next year means that “there is an opportunity cost for borrowers who don’t know what features they have available with their home loans”.
“A home loan is a significant financial commitment and it seems many people are entering into it blindly and under-utilising their loan facilities, and potentially missing out on saving thousands in interest over the life of their loan,” Ms Airey said.
“In the current environment — when we hold high levels of household debt, have easy access to credit and property prices across the nation are elevated — it’s never been more important to have strong financial capability.
“There is a lot of jargon surrounding home loans which can cause confusion. However, there are easy ways that Australians can boost their understanding.”
Ms Airey concluded that while friends and family can offer “tips and hints” based from their own experience, financial planners and advisers can provide “professional in-depth advice and guidance”.
Parker Finance would like to give you a list of important mortgage and financial related terms which will give you a better understanding of issues related to home loan process.
Interest – (Accrued Interest) – Interest calculated and added to your loan but not yet paid for.
Adjustable Rate Mortgage (ARM) – An adjustable (variable) rate mortgage loan has interest rates that are adjusted periodically based on changes in a selected index. As a result, your monthly payment may increase or decrease as result of changes in the overall interest rates.
Arrears – This refers to an amount that is overdue on a loan.
Assets – Property owned by the applicant.
Average Annual Percentage Rate (AAPR): This stands for the Average Annual Percentage Rate. It’s a term we use to describe the “true rate” of a loan. We use the AAPR when we rank loans in our Toolbox software. We use it to work out the real cost of a loan, because it takes into account honeymoon rates, ongoing fees, introductory offers and discharge fees as well as the advertised interest rate. The AAPR calculation is based on the actual loan amount and how much is charged for it over a 7 year period. The AAPR doesn’t include government fees, exit or early repayment fees and service fees like redraw and internet usage charges.
Capital gains: The financial or monetary gain obtained when an asset is sold for more than its original price.
Capital gains tax: A federal tax on the monetary gain made on the sale of an asset bought after September 1985. 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.
Capped loan: A loan where the interest rate cannot exceed a set level for a period of time but, unlike fixed rate loans, the interest rate can fall.
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.
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.
Comparable Sales: Used in Valuation reports to justify the value of the property being used as security a bank loan.
Conveyance: The transfer of property ownership and changing the title of a property from the seller’s name to the buyer’s name.
Conveyancing: The legal process for the transfer of ownership of real estate.
Cover note: A guarantee of temporary property insurance before the implementation of a formal policy.
Closing Costs – closing costs or fees that are charged for services are performed in the process of closing the loan application. Examples of closing costs include title fees, recording fees, application fees, credit report fees, solicitors’ fees, Stamp Duty Taxes and surveying fees.
Credit Bureau – or otherwise known as the Credit Reference Association of Australia. Lenders can obtain credit information on applicants. Several agencies hold this information including VEDA
Debtor: Someone who owes money to someone else.
Deed: Another word for title. It’s a legal document that states all information regarding the ownership of a property or piece of land.
Default: Failure to abide by the terms of a mortgage or loan agreement – such as not making loan minimum required repayments. Defaulting on a loan may result in financial penalties and, in extreme cases, the mortgage holder taking legal action to repossess the mortgaged property.
Deposit: An amount paid by the buyer at the time of exchanging the contract for sale. It acts as a commitment to buy.
Deposit bond: A guarantee from a financial institution that a deposit will be paid to a seller. It’s useful for buyers with savings in a term deposit because it can be offered at the time of exchange – instead of a cash deposit. Which means the buyer doesn’t have to break the term deposit and lose any interest accrued. The buyer must pay the full purchase price of the property, including the amount of the deposit, at settlement. In the event that buyer does not settle on the property the seller will be paid the deposit amount by the financial institution.
Disbursements: Miscellaneous fees and charges incurred during the conveyancing process, including search fees and charges paid to government authorities.
Discharge fees: An administration fee to cover the costs incurred in terminating a loan account.
Discharge of Mortgage: A document signed by the lender and given to the borrower or incoming lender when a mortgage loan has been repaid in full.
Disposable income: A person’s remaining income after all known expenses, such as loan payments and living expenses, have been met.
Draw down: To access available loan funds. Draw down usually refers to a construction loan, or a line of credit. That is a loan where the limit is set, but the amount is not accessed all at once. The borrower draws down or uses the funds as required, up to the set limit. Most residential loans allow extra repayments and have free redraw for clients
Easement: A right to use a part of land owned by another person or organisation, for example to access another property or for utility services such as sewer or storm water drains.
Encumbrance: An outstanding liability or charge on a property.
Establishment fees: Fees charged by a lender to cover the cost of setting up a loan.
Exit or early repayment fees: Penalties charged by some lenders when a loan is paid off before the end of its term. Exit fees were outlawed by the Australian Government on or about 2014.
Extra repayments: These are regular or irregular additional repayments on a home loan account, above the minimum required repayment, which can reduce the term of the loan and the interest payable.
Equity – The amount of an asset which is actually owned. For example if a home is worth is $250,000 and the loan value is for $100,000 then the equity amount is $150,000.
First Home Owners Grant: A grant from the Federal and State Governments. It was introduced as compensation for the increased cost of housing after implementation of the Goods and Services Tax (GST) on 1 July 2000. It’s only for buyers that have not previously bought property in Australia.
Fittings: Items not intended to be removed from a property when it’s sold, for example fixed carpets, lights, curtains and stoves.
Fixed rate: An interest rate that applies to a loan for a set term. Both the interest rate and loan repayments are fixed for the agreed term, regardless of any interest rate variations in the home loan market. The agreed term is usually anywhere between 1 and 10 years.
Freehold: Complete ownership of a property and the land that it’s built on.
Gazumping: When a seller accepts an offer from a buyer but then proceeds to formalise the sale of the property to another buyer with more favourable terms.
Guarantor: A person or organisation that agrees to be responsible for the payment of a loan – if the actual borrower defaults or is unable to pay.
Guarantee – a form of security or document in which another party promises to repay a loan if the borrow fails to repay.
Home Appraisal – a written analysis of the estimated value of your home.
Home equity: The amount of a property actually “owned” by the owner. It’s the current value of a property less the amount still owed on its mortgage. Equity usually increases as the principal of the mortgage is paid off and when property market values increase. For example, if a home is worth is $250,000 and the loan value is for $100,000 then the equity amount is $150,000.
Home loan: The funds borrowed to purchase a property. The property acts as security for repayment of the loan. The lender holds the title or deed to the property via a mortgage.
Honeymoon Rate: A loan offered to new borrowers at a reduced rate for an introductory period – usually 6 to 36 months. It’s also called a discounted or introductory loan.
Instalment: The regular payment that a borrower agrees to make to a lender.
Interest: The amount charged for the money borrowed from a lender. Interest on home loans is typically calculated daily and charged monthly.
Interest only loan: A loan where only the interest is paid for an agreed term, usually 1 to 5 years. The principal is then repaid over the remaining term of the loan by the conversion of repayments to principal and interest.
Interest rate: The percentage of the loan amount, used to calculate the interest to be paid for a loan.
Introductory loan: A loan offered to new borrowers at a reduced rate for an introductory period – usually 6 to 36 months. It’s also called a discounted or honeymoon rate.
Investment property: A property purchased for the sole purpose of earning a return, either in the form of rent or capital gain. The owner does not live in the property.
Joint tenants: Equal holding of a property between two or more people. If one party dies, their share passes to the survivor or survivors.
Lease: An agreement between a property owner and a tenant. It allows the tenant to occupy and use a property for a set period in exchange for a set rent.
Lender’s Mortgage Insurance (LMI): Insurance which covers the lender if a borrower defaults on a loan and the sale of the property doesn’t cover the outstanding debt. Most if not all loans have Lender Mortgage Insurance, however the insurance fee is only passed onto the borrower in certain circumstances. E.g. when a full documentation loan has a Loan to Value Ratio above 80% or some low documentation loans with a Loan to Value Ratio above 60%. Only the lender is covered by this insurance. It offers no protection to the borrower.
Lump sum repayments: Additional ad hoc repayments, made over and above the minimum loan repayment required.
LVR: Abbreviation for Loan to Value Ratio. It is the percentage calculation in the relationship of the loan amount compared to the value of the property. For Example if a house is worth $200,000, and the mortgage is $100,000, then the LVR is 50.0%. Most lenders require a borrower to take out Lender’s Mortgage Insurance if the LVR is 80% or more.
Liabilities – this term refers to a person’s debts.
Lien – the right to hold property
Line of Credit – an interest only loan with a specified limited, somewhat like a credit card.
Loan Maintenance Fee – a loan management fee charged over the life of a loan.
Loan Valuation Ratio (LVR)– the ratio of the amount lent to the valuation of the property or security. This is the ratio of the loan amount to the property valuation expressed as a percentage. For Example if a house is worth $200,000, and the mortgage is $100,000, then the LVR is 50.0%.
Maturity: The date when a debt must be paid in full.
Maximum loan amount: The maximum amount that can be borrowed. It’s based on a borrower’s disposable income, deposit, and the purchase price of the property. Sometimes called Maximum Borrowing Capacity
Minimum loan amount: The minimum amount that can be borrowed. Usually stated in a Lender’s loan policy.
Minimum repayment required: The amount a borrower is contractually obliged to pay each month, in order to repay a loan within an agreed term.
Mortgage Broker: A person or organisation offering to organise or sell loans on behalf of a group of lenders.
Mortgage offset account: A savings account linked to a home loan. The interest earned by the money in the savings account offsets – or reduces – the interest due on the home loan. A 100% offset is where the interest rates earned and paid are the same. A partial offset account is where the interest earned on the offset account is only a portion of the rate paid on the home loan. For example if you have a home loan of $100,000 and $10,000 in an 100% offset account then you would pay interest on $90,000.
Mortgage Protection Insurance: This insurance covers loan repayments should a borrower become sick, injured or redundant and unable to work. It is a form of income protection insurance but only covers the loan repayments and typically requires one upfront premium to be paid. This insurance covers the borrower not the lender.
Mortgage registration fee: A State Government charge for the registration of a loan. Because the property acts as security for a home loan, the government requires a home loan to be registered so that all claims on a property can be checked by any future buyers of that property.
Mortgagee – the lender of the funds.
Mortgagor – The person borrowing the money.
Principal – the capital sum borrowed on which interest is paid.
Principal and Interest – A loan where both the principal and interest are repaid together over the life of the loan.
Passed in: A property is ‘passed in’ at auction if the highest bid fails to meet the reserve price set by the seller.
Portability: Allows a different property to be substituted as security for an existing loan. Useful if you are buying a new home but don’t want to set up a new mortgage.
Principal & Interest loan: A loan in which both the principal and interest are repaid, during the agreed term of the loan.
Redraw Facility – a loan facility where you can make additional payments on a loan with the option of accessing this money if it is needed in the future.
Refinance: To switch mortgage providers and arrange a new loan for the same property.
Reserve price: At an auction, this is the minimum price acceptable to the seller of a property.
Searches: Research carried out, prior to the settlement of the property, to confirm information about the property. Searches are usually arranged by a solicitor or conveyancer. They can included searches on title for other parties with an interest in the subject property or searches to various government agencies such as roads to ensure the property is not likely to impact by future works.
Security: An asset that a borrower gives a lender the rights to – so the lender can be confident of getting the money back, one way or another if the debt is not re-payed as per the loan agreement.
Settlement: There are generally two types of settlement that happen with most property purchases:
- Settlement of the property is when the balance of the purchase price is paid to the seller. The buyer receives the keys and becomes the legal owner of the property.
- Settlement of a loan coincides with settlement of the property. It’s when the lender transfers the borrowed funds to the seller or the seller’s mortgage holder.
Split loan: Generally, a loan that is part variable and part fixed, but it can also be a loan with multiple variable parts. Borrowers wanting to use equity in a property to invest in the share market may make “multiple variable splits” to better track the return on their investment.
Stamp duty: A State Government tax based on the purchase price of the property. It’s also payable on mortgages in some states. Each state and territory has different rules and calculations. To estimate the amount of stamp duty you may have to pay, use our stamp duty calculator.
Strata title: The most common title associated with townhouses and home units. It acts as evidence of a unit’s ownership. In a strata plan, individuals each own a small portion of a strata building such as a unit – which is identified as ‘lot’ on the title. All owners in a strata plan share common property such as external walls, windows, roof, driveways, foyers, fences, lawns and gardens.
Tenants in common: A form of agreement often used when friends or family purchase a property together. It details the equal or unequal holding of property by two or more people. If one person dies, their share passes according to their Will or the law, rather than to the owner of the other share.
Term: The duration of a loan, or a specific period within that loan. This is usually written in months for example, 360 months equals 30 years.
Title fees: Charged by a state or territory’s Titles Office for title searches, property ownership transfers, the registration of new mortgages and the discharge of old ones.
Transfer: A document registered with the Titles Office that confirms the change of ownership or a property.
Title – a document that gives evidence of ownership of the property. It also indicates the rights of ownership of the property.
Uniform Consumer Credit Code (UCCC): This is the legal framework that governs the relationship between borrowers and lenders. It requires all credit providers such as banks, building societies, credit unions, finance companies and businesses, to:
- Explain the borrowers rights and obligations
- Disclose all relevant information about a loan in a written contract – including interest rates, fees, and commissions.
Valuation – a report which is an independent professional’s (Valuer) opinion on the value of the property. The valuation can be more or less than the purchase price. The Value of a property is typically based on comparable sales in the same area as the property.
Valuer: So called independent expert on the value of properties
Variable Interest Rate: A rate that may go up or down depending on the Reserve Bank or Australia’s reference rate, Government policy or the cost of securing wholesale funds.
Variable Rate: A rate that may go up or down depending on the Reserve Bank or Australia’s reference rate, Government policy or the cost of securing wholesale funds.
Variation: A change to any part of a loan contract.
Variable Home Loan: A loan with a Variable Interest Rate
Zoning: Statutory descriptions of the allowable uses of land as set out by local councils or State planning authorities.
www.theadviser.com.au/ “Borrowers increasingly unsure of home loan terms” / Annie Kane