Glossary of Finance Terms

Interest Rate

The amount of interest that is charged on a loan, in proportion to the amount borrowed, to allow a bank or lender to earn a profit when distributing funds.

Guarantor  

In property development transactions, additional security could be required by lenders to reduce their risk should the developer default on the loan.  This guarantee can take various forms from cash to property.

Security 

Security on a mortgage is essential because it reduces the risk a lender takes on when providing a loan. If a loan is backed by property for example. If the borrower defaults on repayments, the lender may seize the property to claim the outstanding debt.

Commitment Fee 

A fee added onto a loan to compensate a lender for their commitment to offer funding. These fees are often linked to costs like undisbursed loans or unused credit lines.

Shareholders 

A person or business that owns a share in a company’s stock. They can receive capital gains, take capital losses, and they may receive dividend payments. They are equity owners and are subject to the same benefits and drawbacks as Directors.

Director 

An individual responsible for managing the operations of a company, with the ability to exercise the business’ powers for whatever needs it may have.

Property Acquisition 

A term used for obtaining legal ownership or rights over real estate. The rules may vary from one state to another.

Indicative Offer 

Lenders often provide an indication or suggestion that the offer may proceed if conditions are met, also known as a conditional offer.

Economy 

The state of how goods and services are produced, distributed, sold, etc., as well as the supply of money, within a region or country.

Offshore 

Ideal for overseas investors, most offshore financing options are available for competitive prices and offer enticing sums of money. In general, the applications to be considered are company borrowers.

Credit 

While this is used to refer to several aspects with respect to lending, it is most commonly the term used to describe a contract agreement where an individual receives money and repays the lender by a predetermined date (usually with an additional interest fee).

Property Settlement 

A legal process facilitated by the legal and financial representatives of the purchaser and the seller. Settlement occurs when ownership is passed from the seller to the buyer. Typically, the settlement date is determined in the contract of sale by the vendor.

Initial Public Offering 

The process of offering shares of a corporation in a public share issuance, which can allow a company to raise capital from public investors. Often abbreviated to IPO.

Joint and Severally 

Where all parties are equally accountable for the full terms of the agreement, they are in. As an example, in the instance of a personal liability case, each party will be pursued for repayment of the entire amount owed.

Non-recourse Loan 

A loan secured by collateral, such as a property, where a lender can seize the security if a borrower defaults on their payments. The difference from normal scenarios is that the lender cannot obtain further compensation, even if the collateral does cover the full amount of the unpaid loan.

Recourse 

A lender’s legal right to obtain a borrower’s security if the debt obligation is not fulfilled. A full recourse is when a lender can take additional assets to repay the entire unpaid debt.

First Mortgage 

When a borrower uses property as security for the first time as collateral for a loan. As usual, if the mortgage repayments are not met as agreed, the lender can seize the security.

Second Mortgage 

A term used when a borrower offers their real estate as collateral a second time to another lender while the first still has finance secured on it. The subsequent lender takes second charge over the property.

Quantity Surveyor 

An independent consultant who examines the building costs associated with the architectural plans.  in conjunction with the DA (development approval) and considers the changes in market conditions impacting labour costs and material suppliers. They are also retained by lenders to ensure that the project is correctly costed.

Caveat 

In terms of loans, a property caveat is a claim to a property in the form of a legal document. Creating a caveat allows both parties to claim their share of interest. Until the caveat is resolved, no further transactions can be registered against the title.

Letter of Offer  

When a finance offer is presented to a borrower it can be either accepted or rejected depending on the borrower in question acceptance.

Litigation  

The court system uses litigation to resolve disputes. When two parties are engaged in litigation, another party may make the final decisions for them, such as a judge, unless they settle before trial.

Share Certificates  

Whenever a company sells shares on the market, it issues shares certificates. As proof of ownership and as a record of the purchase, shares certificates are issued to shareholders.

Business Activity Statements (BAS)  

BAS is used to reconcile the tax collected by a business known as Good and Services Tax (GST). It is required to be paid to the government on a monthly, quarterly, or annual basis.

Conveyance 

When a property is transferred from one party to another, typically in real estate. This could be when a seller transfers the ownership of a property (a home or land) to a buyer. Typically, this is done using a legal document as an instrument of conveyance, like a lease, title, deed, or contract.

Profit 

When the financial earnings of a business activity exceed the amount needed for the costs, taxes, etc. As a simple example, this could be when a company buys something and sells it for a higher price.

Collateral 

Another term for security, or an asset that is accepted as security for a loan by a lender. Collateral is a form of protection to mitigate the risks involved with lending.

Preferred Equity 

Investments or loans exceeding the level normally associated with project and mezzanine debt, but not participating as equal ranking equity, are deemed preferred equity.

Gross Realised Value

In the context of property construction, the Gross Realisation Value is the gross sales (or GST exclusive value of the property) upon the completion of the project. Often abbreviated to GRV.

Net Realised Value 

A term used for the value of an asset, which will be realised upon the sale of the asset typically with a slight reduction due to expected causes and is commonly abbreviated to NRV.

Reserve Bank of Australia 

Is the governing central bank that publishes monetary policy and interest rate announcements. This can have a varying, underlying effect on mortgage rates.

Arrangement Fees 

Additional charges from lenders to compensate the effort put into providing financing to a borrower. This fee can typically vary from one lender to another. 

Credit Score 

A rating indicative of an individual’s financial record, typically used by lenders to determine whether to accept funding applications based on the risk associated with the borrower. Also commonly referred to as a credit rating.

Lease Agreements 

It is a legal contract to occupy the property. A lease is a contract that binds the property owner and the tenant, and a lease is an agreement between the owner of the property and the tenant for the use and possession of the property.

Residential Tenants  

In most cases, residential leases last for one year; any shorter would be costly for the property owner when it comes to re-tenanting costs such as marketing, rental income delays and re-letting fees to the agent.

Commercial Tenants 

It is standard in commercial, industrial, and retail properties to arrange long-term leases. in addition, outgoings are negotiated but usually passed onto the tenant.

Deposit 

The amount of money needed to be paid upfront as part of the loan agreement. The amount specified can often vary depending on a variety of circumstances.

GSA (General Security Agreement)  

To secure the lender’s interest against the relevant security entity/asset, GSAs are registered on a National Register. As part of the Register, lenders can also negotiate a priority system to ensure that their interests are protected and prioritized.

Legal Fees 

On completion of the purchase, the solicitor or conveyancer will charge a fee for the legal work carried out during the purchase process. Typically, solicitors charge a flat fee regardless of the value of the property.

Court Judgements 

If a person cannot repay their creditors, creditors can obtain a judgment in a court.

Equity 

Property equity is the difference between the remaining debt and the capital value of the asset in question.

Pre-sales 

Where a lender will want a certain number of presales to reduce their risks. While the percentage of presold units is not typically set, funding can vary slightly from one lender to another.

Development Approval 

Local town planning authorities provide written approval of a given project, typically prepared by the developer’s or landowner’s consultants, allowing the project to move forward as per the development plan.

Capital Gains Tax  

If you sell an asset such as investment property for a profit, you are subject to capital gains tax (CGT). At the end of the fiscal year the capital gain is added to your income tax.

Mortgage 

A debt passed onto a borrower from a lender secured by property.

Statement of Position   

A statement of a company position related to their assets and liabilities showing the current equity position.

Principal and Interest Mortgage 

A standard mortgage, with the difference that monthly repayments are part capital and part interest.

Land Banking 

Usually refers to financing secured for the acquisition and holding of developmental sites with no certainty of immediate development.

Residential Mortgage 

Mortgages that are taken out against residential properties.

Valuation 

A detailed report specifying aspects of a property’s market value. Not to be confused with an appraisal, as a valuation provides a more accurate and recognized property value. This will often come from an independent, impartial valuer.

Loan to Value Ratio 

All lenders use a Loan to Value Ratio to assess risk when they consider funding and can have a tremendous impact on the terms offered. Commonly abbreviated to LTV or LVR.

Progress Payments 

As the construction progresses Lenders typically drawn down payments in stages. It is particularly important for the lender to report the work completed by its Quantity Surveyor, so they can compare the completed work as part of the loan agreement.

Senior Debt 

Referred to as a primary mortgage, or principal debt, it is the registered mortgage that holds the property’s first ranking. Developers often prefer senior debt as the margins are typically lower since senior debt is typically provided by banks or major mortgage funds. Senior Debt is considered at lower Loan to Value Ratios.

 

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This summary sets out the key points about how Sherwood Finance Australia handles personal information.

Finance may collect, hold, use and disclose personal information to carry out our functions or activities in compliance with the Privacy Act 1988  (Privacy Act) and in particular the Australian Privacy Principles (APPs) found in that Act.

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Personal information (including sensitive information) about you may be collected by Sherwood Finance from you, from your agent, or from a third party.

Sherwood Finance may also collect personal information through our website and social networking services such as Facebook, YouTube and Twitter. We use this information to help us communicate with you and the public.

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We offer an end to end financial solution with a focus on making the
process as simple and stress-free as possible.