The banking industry, like many other fields, has its own set of jargon and terminology. If you’re in the industry, these may seem obvious, but if not, hopefully this helps you when dealing with banks/lenders or finance workers.
Here are some common jargon terms used in the banking industry:
Collateral/security: An asset or property that is used as security for a loan. If the borrower fails to repay the loan, the lender can take possession of the collateral.
Loan-to-Value Ratio (LVR): the % of loan you take against the value of the asset. E.g., a house worth $1m with a loan of $800k = 80% LVR.
Low Equity Margin: if you buy a house with less than 20% deposit or an investment property with less than 35% deposit, then an interest rate margin is added. This tends to be 0.25%-0.75%. It is added because this is higher risk lender and in banking rates and borrowing is determined by risk.
Rate Lock: An agreement between the borrower and the lender that guarantees a specific interest rate for a set period. You can lock in rates once all loan conditions are met, and you are a certain number of days out from settlement. 60 days out for some banks, 35 for others.
Equity Release: This is effectively a top up. If you have built up equity in your property or asset, then you can often borrow more against it to purchase other assets, inject into your business or many other purposes you may need money.
Fixed-Rate vs. Variable Rate Mortgage: A fixed-rate mortgage has a constant interest rate for the term that you choose to fix for when selecting your structure, providing predictability for borrowers. In contrast, a variable rate mortgage has an interest rate that can change over time, typically in response to movements in the OCR.
Offset Mortgage: With an offset mortgage, the balance of your savings or current account is offset against the outstanding balance of your mortgage. This means that the money in your savings or current bank account is effectively used to reduce the amount on which you pay interest, your repayments will stay the same, so you pay the loan off faster.
Revolving credit / Overdraft: These 2 are effectively the same thing. This is just access to more funds added on to a traditional transaction bank account. It allows you to go below zero to the limit that is put on. You pay interest at the end of the month on the total tally of the daily balances combined in interest.
Debt-to-Income Ratio (DTI): A measure that compares a borrower's total monthly debt obligations to their gross monthly income, used by lenders to assess a borrower's ability to repay a loan. For example, if you and your partner are both on a loan, we will add up both your combined income sources and then add up all your combined debts.
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For example, total overall gross income = $100k and your total debt including vehicle, mortgage, cards = $600k, then your DTI = 6 x.
GSA (General Security Agreement): If a lender is requesting this, it means they are taking security over everything that entities own. If the event of default, they can repossess all your business assets if they hold a GSA over your business. However, holders of an SSA override that on assets with an SSA.
SSA (Specific Security Agreement): This is common is asset finance, where the lender will only take security over a specified asset. An example of this is a vehicle loan. The lender will only take security over the vehicle. If you or your company defaults, they can only repossess the particular asset with SSA over it.
Personal Guarantee: This is required in just about all personal and small business lending. if a personal guarantee is provided to debt and you default, the lender can sue you personally and come after you to recover repayments even if they don’t have security to other assets you own.
AML (Anti Money Laundering): This is something that must be done with every loan application and new customer to a lender. It means identifying each borrower, guarantor and associated party to the loan. In some cases, identifying the source and wealth of funds.
Finance Date: This is the date you must go unconditional by satisfying all conditions so that there is nothing left to do except sign the loan documents and settle the loan. A non-refundable deposit is paid on this date to lock you into the transaction.
Refix: Many get this confused with refinance. A refinance is either changing lenders or changing the amounts borrower and overall structure of a loan. A refix is simple choosing a new interest rate for the same loan that isn’t disrupted. You may have a 20-year term loan in total and have fixed for 2 years. In 2 years, your loan will have 18 years left, and will just choose a new interest rate to lock in for the next portion of this.
If you have any other jargon or lingo, you would like clarified, please ask.
