Mortgage dictionary: part one

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May 1, 2011

Mortgage terminology can be like rocket science. Signing a loan is one of the most important decisions you will make in life and a legally binding contract that you need to completely understand.

Here’s a breakdown of common mortgage words which every borrower should know the meaning to:

Accrued interest: This is the interest that has been calculated since the last interest payment (or investment) but not yet added to the total amount.

Arrears: The amount of money that is overdue on a loan. Being behind payment would be referred to as being ‘in arrears’.

Bridging Loan: This loan is great for investors as it allows you to buy a second home even though your first one may not yet be sold. Helps when it comes to gaining ground on interest.

Collateral: Is an asset you pledge as security for the payment of the loan.

The consumer credit code: A national uniform piece of legislation which protects the rights of personal consumers by ensuring financial instructions, such as banks and credit unions, adhere to the same rules when providing credit or loan contracts.

Equity: The amount actually owned. If your home is worth $400,000 and your loan is $100,000, then your equity is $300,000.

Fixed rate mortgage: A fixed rate mortgage is one which is taken out on the basis that the interest rates will remain the same for the life of the mortgage.

Liabilities: Your obligation to repayments – therefore very important!

Loan to value ratio: Sometime referred to as LVR, this is the percentage of the loan amount versus the property amount

Principal: The sum borrowed on which you then make interest payments.

Negative gearing: Refers to any cost a borrower pays to maintain their investment. Loan repayments, maintenance and council rates are examples of gearing.

Variable rate mortgage: A variable rate mortgage is one which is taken out on the basis that the interest rates will adjust based on changes within the economy.

If you’ve found these explanations helpful, we suggest you continue on to read Mortgage dictionary: part two. It should help decipher all the various mortgage terms that can make the application process less stressful.


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