Finance terms – how many do you know?
We often hear finance terms on television or mentioned in our newsfeeds, but what do they all mean? Test yourself below with how many terms you can define!
Borrowed money or other finance to be paid back under an arrangement with a lender.
Deposit (on home loan).
With a standard home loan, the most you can borrow is 95% of the value of the property. You have to come up with the rest yourself before you apply for the loan – preferably from genuine savings.
Equity (home equity).
The difference between what you owe on your home, and what your home is currently worth.
An interest rate that is locked in for a set period of time.
“Full doc” stands for “full documentation”. It’s a loan that’s designed for borrowers who can provide full documentation of their income (payslips, tax returns and other financial statements). When you apply for a full doc loan, you get more options and generally a lower interest rate.
Evidence of regular savings over a defined period of time.
A third party to a loan who is helping the borrower obtain finance by offering additional security support. Guarantors are generally limited to spouses or immediate family members. A guarantor may be liable for the loan debt if the borrower defaults.
Lenders Mortgage Insurance (LMI).
If you want to borrow more than 80% of the property’s value, you have to pay mortgage insurance (LMI). Mortgage insurance is a one-off payment, usually made when you settle on the property. The amount you pay depends on the loan amount, the value of your property and how much of the purchase price you want to borrow (e.g. 95%). It protects the lender in the event that you can’t meet your repayments and the home is sold with the debt outstanding.
Loan to value ratio.
How much of the purchase price you want to borrow. E.g. If you want to borrow $160,000 to buy a property worth $200,000, the LVR would be 80% (160,000/200,000 x 100).
Sums of money that may have been gifted to you or received as a lump sum from a transaction, but have not been a regular occurrence over time.
Whenever you buy a house or a block of land, you have to pay a state government tax on it. This tax is called stamp duty, and it’s calculated on the purchase price.
Variable interest rate.
A home loan interest rate that fluctuates according to the official cash rate set by the Reserve Bank of Australia.