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Finance Glossary

A

Amortisation Period – Time taken to reduce the value of the debt through payment of regular instalments until the loan has been paid off in full.

Annuity – A payment at regular intervals of a certain sum of money for a term of years or during the life of an individual.

Arrears – The amount you have not paid in respect of scheduled repayments for a debt owed (i.e. past the due date). This is different from the balance owing

Assets – are things you own. These can be cash or something that can be converted into cash such as property, vehicles, equipment and inventory.

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B

Balloon Payment – a final lump sum payment due on a loan agreement. Loans with a larger final ‘balloon payment’ have lower regular repayments over the term of the loan.

Borrower – A person using money that has been loaned to them by a bank or other lender or a person. Another name for a borrower is a debtor.

Bridging Finance- Short term finance used when buying and selling houses to cover the gap between receipt of funds from sale of existing house and the payment of funds to purchase another house

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C

Capital Gain – Profit from sale of a particular asset at a higher market price than it cost. Investors often buy for the sale of an expected increase in value of an asset rather than of the income it may generate during the time they own it.

Cash Advance – This is a cash loan which is withdrawn from a credit card. Credit card issuers charge interest from the date when the cash advance is taken until it is paid back. A transaction fee may also be charged.

Cash Management Trust – A unit trust where investors (unit holders) pool their money into money market instruments which are normally only available to professional investors with hundreds of thousands of dollars to invest in the money market. Cash trusts operate with a trust deed, a trustee overseeing activities and a management company responsible for the investment strategy.

Co-borrower – A person who borrows money jointly with you. Each individual is jointly and separately responsible for the repayment of the loan. This means that if one person does not pay the other person will be required to pay the full amount of the loan.

Certificate of Title – The document of title to the estate or interest in land. It sets out the Crown description of the land, proprietorship and shows any registered interests such as mortgagees, charges and caveators. It also shows any restrictive covenants and easements which affect the estate or interest.

Chattel Mortgage – is similar to a hire-purchase agreement although the business owns the asset from the start. Chattel mortgages require regular ongoing payments and typically provide the option of reducing the payments through the use of a final ‘balloon’ payment.

Comparison Rate – The Comparison Rate provides an indicative interest rate that takes into account certain costs associated with setting up a loan. This rate includes the nominal interest rate/s, loan approval fee, any other up front fees and known ongoing fees. The Comparison Rate does not include government and statutory fees, since these are standard across all loans regardless of the lender. It also doesn’t include other fees and charges that are ‘event based’ and which may or may not apply throughout the term of your loan (for example, redraw fees and early repayment costs).

Compound Interest – Interest which is paid on accumulated interest as well as the original principal invested.

Consumer Price Index (C.P.I) – Measures the national inflation rate. The index is measured quarterly (December, March, June and September quarters) and reflects changes in prices (up or down) of a fixed “basket” or list of goods and services.

Contract of Sale – A written agreement which details the terms and conditions regarding the purchase or sale of a property. It is usually prepared by the vendor’s agent, solicitor or conveyancer.

Conveyancing – The legal process where ownership of real estate is transferred from one party to another.

Cover Note – This is a document giving temporary insurance cover over a property until a formal policy is issued by the insurance company.

Credit History – a report detailing an individual’s or business’ past credit arrangements. A credit history is often sought by a lender when assessing a loan application.

Credit File – A file or report that is kept by an agency such as Veda Advantage which shows your credit history such as loan applications you have made, credit you hold, defaults on loans, how you have repaid credit in the past and bankruptcy. Credit files or reports are kept and maintained by credit agencies and may be accessed by banks and financial organisations to help them assess any application for credit you make with them. Credit reports can hold both negative and positive information about your credit history. If you have always paid your bills on time and you have never defaulted on a loan or credit repayments, your credit report may assist you to secure credit. In contrast, a negative credit file may make it difficult for you to borrow money from a lender.

Credit Limit – a dollar amount that cannot be exceeded on a credit card or the maximum lending amount offered for a loan

Creditor – a person or business that allows you to purchase a good or service with an agreement to pay at a later date. A creditor is also anyone who you owe money to, such as a lender or supplier.

Credit Rating – A person’s credit rating is based on their credit file or credit history. A person who has a credit file or a bad credit history is likely to have a poor credit rating. Banks and financial organisations refer to credit ratings when considering applications for loans and credit cards. A person with a poor credit rating may find it very difficult to obtain a loan or a credit card. Credit providers obtain this information through credit reporting agencies, such as VEDA Credit Check.

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D

Debt – any amount that is owed including bills, loan repayments and income tax.

Debt Consolidation – the process of combining several loans or other debts into one for the purposes of obtaining a lower interest rate or reducing fees.

Debt to Equity Ratio – This is the amount of the loan compared to the value of the property or asset purchased with the loan funds, expressed as a percentage. For example, a loan of $400,000 to buy a property worth $500,000 results in a debt to equity of 80%. Banks will place a limit on the debt to equity ratio depending on things such as the type of property, the location and the financial position of the borrower. Also known as Loan to Value Ratio (LVR). binding promise given by a person (the guarantor) to pay a debt, if it is not paid by the borrower. It can be a secured or unsecured guarantee

Debtor – a person or business that owes you money.

Default – When you fail to meet the terms or requirements of a signed contract there is a default. For example, not making your scheduled repayments on a loan or not making them on time.

Deposit – An amount of money placed in trust or paid to the vendor directly as evidence of intention to buy. In most cases, it is 10% of the purchase price.

Depreciation – the process of expensing an asset over a period of time. An asset is depreciated to spread the cost of the asset over its useful life.

Disbursements – money that is paid out by a business.

Drawdown – The disbursement of loan funds provided by the Bank.

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E

Encumbered – an encumbered asset is one that is currently being used as security or collateral for a loan.

Encumbrance – A legal claim on a particular property. e.g. easement or mortgage.

Equity – The part of an asset (house) which you own over and above the amount borrowed from the Bank which has a mortgage over the house property.

Expenses – The amount it costs you for your everyday living including food, transport, housing, clothing and entertainment.

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F

Facility – a predetermined arrangement such as an account offered by a financial institution to a business (e.g. a bank account, a short-term loan or overdraft).

Freehold – Common term used for an ‘estate in fee simple’. This means that the proprietor of the land has absolute ownership of the property.

Financial Statement – a summary of a business’ financial position for a given period. Financial statements can include a profit & loss, balance sheet and cash flow statement.

Financial Year – a twelve month period typically from 1 July to 30 June.

Fixed Asset – a physical asset used in the running of a business.

Fixed Cost – a cost that cannot be directly attributed to the production of a good or service.

Fixed Interest Rate – when the interest rate of a loan remains the same for the term of the loan or an agreed timeframe.

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G

Goodwill – an intangible asset that represents the value of a business’ reputation.

Gross Income – the total money earned by a business before expenses are deducted.

Gross Profit – (also known as net sales) the difference between sales and the direct cost of making the sales. (also known as net sales) the difference between sales and the direct cost of making the sales.

Guarantee – With regard to a warranty: a promise or an assurance, especially one given in writing, about the quality or durability of a product or service. With regard to a loan: a legally binding promise given by a person (the guarantor) to pay a debt, if it is not paid by the borrower. It can be a secured or unsecured guarantee.

Guarantor- a person who promises to pay a loan in the event the borrower cannot meet the repayments. The guarantor is legally responsible for the debt.

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H

Honeymoon Rate – An initial special low interest rate for a specified period on a loan. It gives you an opportunity to make further repayments during the honeymoon period to reduce the amount owing on your loan. The loan will usually change to a higher variable interest rate at the end of the honeymoon period.

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I

Interest – The amount a lender charges a borrower for the use of the lender’s money. For example, if money is borrowed from a lender in the form of a loan, the lender will charge interest for the use of that money.

Interest Only – An ‘interest only’ loan means that your repayments only go towards repaying the interest for a specified period, rather than repaying the principal amount of the loan. For example, paying your loan “interest only” means that the principal balance stays the same. Paying interest only can be good if you need extra money for buying furniture or improving your home. It is also popular for investment loans.

Interest Rate – a percentage used to calculate the cost of borrowing money or the amount you will earn. Rates vary from product to product and generally the higher the risk of the loan, the higher the interest rate. Rates may be fixed or variable.

Investment – an asset purchased for the purpose of earning money such as shares or property.

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J

Joint Debt – When two or more people borrow money together or incur a debt together. A lender can recover payment of the whole amount from either party, unless the contract limits the amount each party must pay. This is not affected by any private agreement held between the borrowers, nor is it affected by any family law property agreement.

Joint Tenants – The holding of land by two or more persons where there is a right of survivorship i.e. on the death of one joint owner, the land as a whole vests in the survivors and can only be disposed of by will by the last surviving owner.

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K

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L

Land tax – Based on the property value, it is a State Government tax which is payable by the owners of the property.

Lease – An agreement between two parties under which one is granted the right to use the property of the other for a specified period of time in return for a series of payment by the user to the owner.

Leasehold – The right to use and have exclusive possession (but not ownership) of real estate for a specified period and subject to the fulfilment of certain conditions as recorded in a lease agreement.

Lender’s Mortgage Insurance – LMI is generally payable if you have less than 20% deposit for a purchase. This is a once off non-refundable payment.

Liabilities – Debts owed by a company or individual

Line of Credit – an agreement allowing a borrower the ability to withdraw money from an account up to an approved limit.

Loan – a finance agreement where a business borrows money from a lender and pays it back in instalments (plus interest) within a specified period of time.

Loan Repayment Capacity – Your monthly fixed debt commitments divided by your monthly gross income expressed as a percentage.

Loan to Valuation Ratio – The amount of the loan financed as a proportion of the property value, expressed as a percentage.

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M

Managed Funds – An investment fund that pools together money that has been contributed by many investors for the purposes of investing the total amount in different investments such as shares, listed property trusts, bonds and cash.

Maturity Date – when a loan’s term ends and all outstanding principal and interest payments are due.

Mortgage – A document drawn up between a borrower and lender, giving the lender a conditional right to property as security for the money lent.

Mortgagee – The one who lends the money to purchase the goods or property.

Mortgagor – The one who borrows the money to purchase the goods or property.

Mortgage Broker – A person or company that will assist you to find the most appropriate home or residential investment loan for your situation. Mortgage brokers may charge you a fee for their services or be paid a commission from the lender.

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N

Negative Gearing- A way of obtaining tax advantages through an investment where the deductible expenses (typically including interest) exceed the income derived from the investment

Net Assets – (also known as net worth, owner’s equity or shareholder’s equity) is the total assets minus total liabilities.

Net Income – the total money earned by a business after tax and other deductions are taken out.

Net Profit – (also known as your bottom line) is the total gross profit minus all business expenses.

Net Worth – Your assets less how much you owe on your assets is your net worth. In order to meet basic needs and life events, an increase in your net worth should be a basic financial goal of most people.

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O

Offset Account – A bank account that is linked to a nominated home or residential investment loan. The balance of the offset account reduces the amount of interest payable on your linked loan. This does not mean that the loan does not have to be repaid, only that the amount of interest that is otherwise payable may be reduced. You will be able to access your money in an offset account

Original Documents – Paperwork or documents that are not a copy or reproduction ie. not photocopied or faxed and all signatures on the document are original.

Overdraft Facility – a finance arrangement where a lender allows a business to withdraw more than the balance of an account.

Overdrawn Account – a credit account that has exceeded its credit limit or a bank account that has had more than the remaining balance withdrawn

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P

Plant and Equipment – a group of fixed assets used in the operation of a business such as furniture, machinery, fit-out, vehicles, computers and tools.

Principal – the original amount borrowed on a loan or the remainder of the original borrowed amount that is still owing (excluding the interest portion of the amount).

Profit – the total revenue a business earns minus the total expenses. See also Revenue.

Profit and Loss Statement – (also known as an income statement) is a financial statement listing sales and expenses and is used to work out the gross and net profit of a business.

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Q

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R

Redraw – A redraw facility gives you easy access to the money that you have repaid on your loan in excess of your scheduled repayment amounts. This facility may not be offered by all banks and may not be automatically available. Fees may apply. It is a convenient way to borrow money back from a bank without having to apply for another loan. See also ‘Equity’.

Refinance – when a new loan is taken out to pay off an existing one. Refinancing is often done to extend the original loan over a longer period of time, reduce fees or interest rates, switch banks, or move from a fixed to variable loan

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S

Savings – Money that you put away for use at a later time. For example, you may save to buy a car or a house in the future. When a bank lends you money, they like to see a long history of steady saving. Saving is a good way to make sure you are able to meet your needs and the requirements of different life events. See also ‘Term deposits’.

Security – (also known as Collateral) is property or assets that a lender can take possession of, in the event that a loan cannot be repaid.

Stamp Duty – Revenue raised by governments on written instruments such as agreements, conveyances, transfers of land. When buying a home, the most common types of stamp duty payable are stamp duty on transfer of land and stamp duty on mortgage.

Strata Title – Most commonly used for flats and units, this title gives you the ownership of a small piece of a larger property. You have sole right to a particular unit and can lease, sell or legally dispose of your unit as you desire. You also have an undivided share of the common land. You also become a member of the Body Corporate which controls maintenance.

Stratum Title – This title gives you legal ownership over a piece of property and also gives you a share in the company set up to look after the common areas of the flats or units you live in. It does not include “air space”.

Superannuation – money set aside for retirement, that must be paid into a complying superannuation fund.

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T

Tax File Number (TFN) – A nine digit number issued by the Australian Taxation Office to individuals and companies to identify them for taxation purposes. Every Australian resident, and registered company should have a TFN. A TFN is different to an ABN. See also ‘ABN’

Tenants in Common – Each tenant (or owner) owns a specified share of the land. Shares can be equal or unequal. Unlike joint tenants, there is no right of survivorship. Each share may be dealt with by sale, bequest, gift etc., as for sole ownership.

Term – A period of time. For example, the length of time for which a deposit is made, or the time in which a loan must be repaid.

Term Deposit – Money invested for a fixed term at a fixed rate of interest which applies for the duration of the deposit.

Title Search – A Search undertaken of records registered at the land titles office to confirm interests in land of a particular land property. A title search show interests such as proprietor, mortgagees, charges, and caveators. The search also reveals any restrictive covenants and easements which affect the estate or interest.

Torrens Title System – Title is under a system given the name of its South Australian author in 1858. The principles of this system are expressed in State Land Title and Real Property Acts and any act or acts amending or re-enacting them. This system gives a registered proprietor of an interest in land a perfect and unchallenged titles, subject only to the encumbrances and conditions mentioned on the title certificate.

Transfer of Land – A document registered in the Land Titles Office which recognises and acknowledges change of property ownership. This is also noted on the Certificate of Title.

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U

Uncommitted Monthly Income – Your available net income once all monthly expenses including loan repayments have been taken into consideration.

Unencumbered – A property free of encumbrances, convenants, restrictions.

Unit Trust – A unit trust is an investment which operates under the unit principle enabling investors to share in a pool of professionally managed investments. The success of a unit trust depends on the expertise and experience of the management company which is responsible for the trust’s investment strategy. Common types of investment undertaken by unit trusts are property, shares, mortgages, and the Short Term Money Market.

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V

Valuation – A report written by a registered valuer, detailing their opinion of the property value.

Variable Interest Rate – when the interest rate of a loan changes with market conditions for the duration of the loan.

Variable Rate Loan – A loan for which the interest rate changes as conditions in the money market change.

Vendor – One who offers a property for sale.

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W

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X

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Y

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Z

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Sources:

Glossary of key financial terms Available from: http://www.business.gov.au/business-topics/tax-finance-insurance/business-finances/Pages/glossary-of-financial-terms.aspx

ANZ 2015, Glossary of terms Available from: http://www.anz.com/auxiliary/help/help/glossaries-terms/