Understanding the terminology used in the lending industry can be overwhelming, but it is important to be informed before making a decision about a loan. To simplify things, here are some of the most common lending terms and their definitions:
- Variable rate: This refers to an interest rate that can fluctuate over time, depending on market conditions. It can offer more flexibility to borrowers.
- Fixed rate: A fixed rate loan has an interest rate that remains the same for a set period, usually between 1 to 5 years. This provides borrowers with certainty in their repayment amounts during the fixed rate period.
- Comparison rates: This is a single rate that includes the interest rate and other fees or charges, making it easier for borrowers to compare different loans and their costs.
- Lenders mortgage insurance (LMI): This protects the lender in case a borrower defaults on a loan and the sale of the property doesn’t cover the full amount of the loan and related costs.
- Redraw facility: This feature allows borrowers to access any additional repayments made that are over the minimum required amount, reducing the interest charged on the loan. These additional funds can still be accessed if needed.
- Pre-approval: This is an assessment of a borrower’s financial situation by the lender, providing guidance on the amount they are willing to lend and their associated loan limit. Pre-approvals are subject to a satisfactory property valuation and other conditions, and are usually valid for a limited period.
- Credit history: Lenders will assess a borrower’s creditworthiness by reviewing their past and existing loans, such as credit cards, car loans, home loans or personal loans. Adverse credit listings such as defaults, bankruptcies or court judgements may negatively impact a borrower’s credit history.
- Income Documentation: Lenders are required to verify a borrower’s income and expenses as part of their assessment. This typically involves providing payslips or tax returns and accompanying financial statements, although self-employed borrowers may use alternative documentation.
If you need more information or want to discuss your borrowing options, reach out to our team for assistance.