KEY TERMS EXPLAINED
Your Lending Glossary
The language of lending - made simple
Home Loans Terminology
Offset Account – A transaction account linked to your home loan where the balance reduces the interest you pay. For example, if you have a $400,000 loan and $50,000 in your offset account, you only pay interest on $350,000.
Loan-to-Value Ratio (LVR) – The percentage of the property's value that you're borrowing. If you're buying a $500,000 home with a $400,000 loan, your LVR is 80%.
Principal and Interest (P&I) – A repayment type where you pay both the loan amount (principal) and the interest each month, gradually reducing your debt over time.
Interest-Only – Repayments where you only pay the interest for a set period (usually 1-5 years), keeping the loan balance the same. Often used by investors for tax benefits.
Redraw Facility – Allows you to access extra repayments you've made on your loan. If you've paid $10,000 extra, you can "redraw" this money if needed.
Lenders Mortgage Insurance (LMI) – Insurance you pay when borrowing more than 80% of a property's value. It protects the lender (not you) if you can't repay the loan.
Fixed Rate – An interest rate that stays the same for a set period (typically 1-5 years), giving you predictable repayments.
Variable Rate – An interest rate that can go up or down based on market conditions and the lender's decisions.
Business Loans Terminology
Cash Flow Loan – Short-term funding to cover temporary cash flow gaps, often used to manage seasonal fluctuations or payment delays.
Asset Finance – Borrowing money to purchase business assets (equipment, vehicles, machinery) where the asset itself secures the loan.
Line of Credit – A flexible loan that works like a large overdraft – you only pay interest on what you use and can draw down and repay as needed.
Security – Assets (property, equipment, inventory) that you offer as collateral for the loan. If you can't repay, the lender can sell these assets.
Serviceability – Your ability to make loan repayments based on your income, expenses, and existing debts. Lenders assess this to determine how much you can borrow.
Business Plan – A document outlining your business model, financial projections, and growth strategy. Often required for business loan applications.
Guarantor – A person (often a director or family member) who agrees to be responsible for the loan if the business can't repay it.
Invoice Factoring – Selling your unpaid invoices to a lender for immediate cash (usually 80-90% of the invoice value) rather than waiting for customers to pay.
Commercial Loans Terminology
Capitalisation Rate (Cap Rate) – The annual return on a commercial property investment, calculated as annual rent divided by purchase price. A $1M property earning $80,000 rent has an 8% cap rate.
Net Operating Income (NOI) – The annual income from a commercial property after deducting operating expenses but before loan payments and taxes.
Debt Service Coverage Ratio (DSCR) – Measures whether a property generates enough income to cover loan repayments. A DSCR of 1.2 means income is 20% higher than loan payments.
Lease Terms – The length and conditions of tenant agreements. Longer leases with quality tenants typically mean better loan terms.
Vacancy Rate – The percentage of time a property sits empty. Lower vacancy rates indicate stronger rental demand and better loan serviceability.
Commercial Valuation – A professional assessment of a commercial property's value, considering rental income, comparable sales, and market conditions.
Interest Cover Ratio – Similar to DSCR, it measures whether rental income can comfortably cover interest payments on the loan.
Medical Financing Terminology
Practice Goodwill – The intangible value of an established medical practice, including patient base, reputation, and future earning potential.
Locum Insurance – Coverage that provides income if you can't work due to illness or injury – particularly important for medical professionals.
Equipment Lease – Renting medical equipment with the option to purchase at the end, often with tax benefits and lower upfront costs.
Professional Indemnity – Insurance that protects medical professionals against claims of negligence or malpractice.
Earnings Multiple – A valuation method for medical practices, typically 0.7-1.2 times annual revenue, depending on the specialty and location.
Fit-Out Finance – Funding specifically for creating or renovating medical consulting rooms, including specialized equipment and fixtures.
Specialist Referral Income – Revenue generated from referrals from other doctors, an important factor in valuing specialist practices.
Medical Professional Package – Special banking and loan products designed for medical professionals, often with preferential rates and terms.
Refinancing Terminology
Rate Comparison – Analysing your current interest rate against what's available in the market to identify potential savings.
Break Costs – Fees charged by your current lender for leaving a fixed-rate loan early. These can be substantial and affect refinancing decisions.
Equity Position – The difference between your property's current value and your loan balance. Increased equity can lead to better refinancing terms.
Loan Portability – The ability to transfer your existing loan to a new property without breaking the loan terms or paying discharge fees.
Cash-Out Refinance – Borrowing more than you owe on your current loan and taking the difference in cash, often used for renovations or investments.
Discharge Fee – The cost your current lender charges to close your loan account and release any security.
Settlement – The process of finalising the new loan and paying out the old one, usually coordinated to happen on the same day.
Loan Comparison Rate – The true cost of a loan including interest rate and most fees, shown as a single percentage to help compare different loan offers.
Construction & Development Loans Terminology
Progress Payments – Staged loan drawdowns that match construction milestones (slab, frame, lock-up, etc.), ensuring funds are available as work progresses.
Practical Completion – The stage when a building is substantially complete and ready for occupation, even if minor defects remain.
Presales – Contracts to sell properties before construction begins. Lenders often require a certain percentage of presales before approving development finance.
Construction Certificate – Official approval to begin building work, issued by council or a private certifier after plans are approved.
Retention Amount – Money held back (usually 5-10%) until defects are fixed and final inspections are complete.
Interest Capitalisation – Adding interest charges to the loan balance during construction rather than requiring monthly payments.
End Debt – The amount owing on a construction loan when the project is complete, often refinanced to a standard investment or commercial loan.
Quantity Surveyor Report – Professional assessment of construction costs used by lenders to determine appropriate loan amounts.
Development Approval (DA) – Council permission to develop land, required before detailed construction plans can be submitted.
Feasibility Study – Analysis of whether a development project will be profitable, considering costs, sales prices, and market conditions.
