Lending terminology can make you feel bamboozled, but if you’re in the borrowing game it’s important to know exactly what you’re getting into. So here are some of the most common lending terms, outlined and defined to make your life that little bit easier.
Your guide to common lending terms:
A ‘variable rate’ refers to a loan that has an interest rate which changes according to market fluctuations. Variable rate products are popular as they typically offer greater flexibility to borrowers.
This refers to an interest rate that stays the same for a set period of time, typically between 1 year to 5 years. The benefit of a fixed interest rate is that it gives borrowers certainty as to their repayment amounts during the fixed rate period.
A ‘comparison rate’ helps borrowers find out the true cost of a loan. Packaged into one single percentage, it includes the interest rate and applicable fees or charges associated with the loan allowing you to easily compare loans.
A conditional approval means the lender is awaiting further information necessary to complete the assessment of your loan. Once a lender has received this information and has finalised your assessment, they may offer a formal approval.
If you’re in the market to buy a property, and want peace of mind when it comes to your finances before making an offer, a ‘pre-approval’ is a smart option. This allows your lender to properly assess your financial situation and approve you for an established loan limit. Any pre-approval is only valid for a certain period of time and will be subject to the lender conducting a satisfactory valuation on the property you wish to buy.
This refers to a type of loan where traditional income documentation is required to assess a loan. This usually means you will need at least two recent payslips (and a payment summary in some instances) if you are paid a salary by an employer or two years of completed tax returns and accompanying financial statements if you are self-employed.
A ‘low doc’ loan allows self-employed borrowers to apply for finance using alternative documentation to verify their income. For example, business activity statements (BAS), bank statements or accountant’s declarations are meaningful ways to establish income levels without having to rely on lodged tax returns.
To assess your creditworthiness, lenders will take into account the conduct on your existing and past loans. This can include credit facilities such as a credit card, car loan, home loan or personal loan. Lenders will also conduct a credit check via a credit reporting agency to establish your loan application history and if you have had any adverse credit listings such as defaults, bankruptcies or court judgements.
A ‘default’ occurs when you are 60 days overdue in making a consumer credit payment. It is important to note however, a default can only be reported to a credit reporting body if the amount is $150.00 or more and two separate written notices have been provided.
Lenders mortgage insurance (LMI):
Lenders Mortgage Insurance protects the lender in the event that a borrower defaults on a loan and the sale proceeds are insufficient to recover the full amount of the loan and the related costs. To find out more about Lenders Mortgage Insurance read this article.
Stamp duty (land):
This is a government tax payable when land is transferred from one individual to another. Stamp duty costs vary state-by-state and the amount payable is determined largely by the property value or contract price. To find out more go to the State Revenue Office website for your state.
Having a ‘redraw facility’ on a mortgage allows you to access any additional funds you have repaid over and above your minimum contributions. The benefit is your additional cash works to reduce the interest charged on the loan, yet remains accessible should you need it. Liberty offers a redraw facility on some products, to find out more about this click here. Still unsure of anything discussed above? If you want more information about your borrowing options or you’d like to discuss your current situation in relation to obtaining finance get in contact with one of our helpful advisers here.