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FINANCIAL TERMINOLOGY
Amortisation
Repayment of a loan by regular
and arranged installments over a pre-determined period of time, typically
20, 25, or 30 years.
Assets
Money, Investments, Property and Goods owned.
Building
Inspection Report
Report completed by house check companies prior to purchase, for the
benefit of home purchasers. Not usually required by lenders. The
report will cover structural soundness of the property, and highlight
any defects, giving purchaser the choice to accept or re-negotiate the
price of the property, if the Agreement for Sale/Purchase is not yet
unconditional or is conditional upon the purchaser being satisfied with
the report.
Code
Compliance Certificate
A certificate issued by the local Council, certifying that all buildings
on the property have been completed to Council’s required standards.
Company
Title
Owners of a group of units form a company which has title over each of
the units, and owners have shares in the company and not individual
titles over their units.
This type of
ownership is not favoured by lenders as shareholders have to approve the
entry of a new owner in the case of change of ownership in any of the
units.
Credit Check
Lenders generally obtain credit reports on prospective borrowers at the
time an application for loan is submitted. Credit information on all
individuals and companies is held by Veda (previously known as Baycorp),
or similar credit bureau, to whom lenders pay an annual subscription.
Individuals can
obtain reports on themselves by application direct to Veda.
Equity
The real value of an asset. This is arrived at by taking the value of
an asset and deducting the amount of debt owing on it.
Finance Date
This is the date by which the
purchaser of a property needs to confirm availability of finance to
vendor. (Done through respective solicitors)
The date is shown on
the Sale & Purchase Agreement or more often expressed as a number of
days after “date of agreement” ( or “date agreement is signed”)
For example;
“10 working days after date of this agreement”.
Fixed
Interest Rate
An interest rate that is set for a fixed term, generally from 6 months
to 5 years. If the loan is prepaid before fixed rate expires, a penalty
may be charged by the lender.
Freehold
Freehold is where the property owner has full possession of property,
with or without mortgage. (Refer also to leasehold, which is only
partial ownership)
Often mistakenly used
to mean “unencumbered”
Guarantee
Security whereby a person
guarantees the debts of another, and will be required to repay the loan
if a default occurs. It is not a wise move to enter into such an
arrangement.
The most commonly
accepted guarantee is one
where say two directors guarantee a trading or property owning company
in whom only they have a shareholding. That is; no other
party is involved.
100% loans
Nearly every lender will write such loans. It should be noted that
significantly better income is needed to service such a loan than would
be needed for a standard loan.
Joint
Tenants
Two or more owners of a property. The property is not owned in separate
shares (each owner cannot deal with his/her share of the property
separately from the other). On the death of one of the owners, both
their entire share is automatically transferred to the survivor/s.
(Refer also to Tenants in Common)
Leasehold
Improvements under a leasehold
are owned by the purchaser of the property, while the land remains in
the ownership of lessee, generally a Community Trust, Church Body or the
like. Ground rent is payable by the purchaser based on value of land,
and with the large increases in land values, the attractiveness of
leasehold properties is disappearing.
Lease terms are
mostly “in perpetuity”, with lease reviews generally every 21 years, and
rent reviews every 3 years. (See also Freehold)
Liabilities
Simply put, these are debts For example; mortgages,
overdraft balances, hire purchase, personal loans etc.
Loan to
Value Ratio
Commonly known as LVR.
An LVR of 81% means
that mortgage loan is 81% of property value, giving the borrower an
equity of 19%.
Low Doc (or
Lo-Doc) loans
Loans where borrowers do not provide proof of income, but sign a
declaration that their income is $.........
Generally such
borrowing comes at a higher interest cost and there may be a Low-Doc fee
payable.
Mortgage
A legal document whereby landed property is given as security by owner
to lender to give the latter the power to take recovery action in case
of default.
Mortgagee –
the lender
Mortgagor –
the owner/borrower
Negative
Gearing
Used by property investors, where the borrowing is geared to produce a
book loss, which can then be deducted from other income for tax
purposes.
Principal &
Interest (P & I )
Loans where the principal and
interest are paid on a regular basis and with amounts similar each
payment date.
Also known as “Table”
mortgages.
Private
Treaty
Private sale between vendor and purchaser, by-passing a Real Estate
firm. Most lenders are likely to insist on an independent valuation in
these transactions.
Refinancing
This is the practice of repaying a loan to one lender and mortgaging to
another. Legal fees are involved in this activity, as mortgage needs to
be discharged and re-registered.
Re-fixing
Each fixed rate taken has an expiry date. Just before expiry, borrower
has the option of re-fixing the rate for a further term, or letting it
revert to floating rate on expiry.
Sale and
Purchase Agreement.
A legal document recording the transfer by sale of a property from
vendor to purchaser.
Every lender requires
such a document as part of a loan application, whether the sale is
effected through a registered Real Estate firm or a private sale.
Security
Legal charge given by borrower
to the lender, which leaves borrower free to use the relative asset, but
giving the lender the right to initiate recovery procedures in case of
default.
Settlement
Date
The date on which purchaser pays the vendor and takes possession of
property, and date of commencement of loan term. This date is shown on
the Sale and Purchase Agreement, and will have been negotiated by vendor
and purchaser.
Tenants in
Common
Where more than one person own a property in separate shares. The
property can be in multiple ownership in any proportion, such as:
2 people
50%/50% or 87%/13% etc
3 people
25%/35%/40% and so on.
On death of any of
the owners, their part of the title goes to their Estate.
Unencumbered
This means that the property is free of any encumbrance, such as a
mortgage or caveat.
Valuation
A report given by a Registered Valuer as to the value of a property.
These reports are specific to a lender, and if another lender is to be
used, the report would need to be re-addressed.
The report is a
comprehensive one, giving a professional opinion of current value, and
should not be taken as a report on structural integrity.
Variable
Interest Rate
An interest rate which varies according to market forces, and is
controlled by the Reserve Bank. Changes can occur at any time, but the
individual changes are small, giving the borrower time to take evasive
action if necessary to “fix” part or all of the exposure.
Also known as
“Floating Rate”
Zoning
A Council authorised
designation of a property, giving details of permitted uses of that
property.
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