Mortgage and finance glossary

Plain-language definitions of Australian finance, mortgage, and lending terms.

ACL (Australian Credit Licence): An Australian Credit Licence is issued by ASIC and authorises an entity to engage in credit activities, including providing credit and acting as a credit intermediary. Brokers who don't hold their own ACL operate as Credit Representatives under an aggregator's licence.
Bridging Loan: Short-term finance used to bridge the gap between purchasing a new property and selling an existing one. Bridging loans allow you to complete the purchase of your new home before your current home has settled. They typically have higher interest rates and fees than standard loans.
Comparison Rate: A rate that combines the interest rate with most fees and charges, expressed as a single annual percentage to help borrowers compare loans more accurately. Calculated based on a standard $150,000 loan over 25 years, so it may not accurately reflect the true cost of larger loans.
Debt Service Ratio (DSR): A measure of how much of your income is consumed by debt repayments, expressed as a percentage. Lenders use DSR as part of their serviceability assessment to determine how much additional debt you can take on. There is no universal DSR threshold -- different lenders apply different limits.
Fixed Rate: An interest rate set for a defined period -- typically one to five years -- that does not change regardless of movements in the cash rate. Fixed rate loans provide certainty over repayment amounts but typically restrict extra repayments and may not include offset accounts.
LMI (Lenders Mortgage Insurance): Insurance that protects the lender if a borrower defaults and the property sale doesn't cover the outstanding loan amount. LMI is typically required when a borrower's LVR exceeds 80%. The cost can amount to tens of thousands of dollars and can sometimes be avoided through a guarantor arrangement.
Low Doc Loan: A home loan for borrowers who cannot provide standard two years of tax returns -- typically self-employed people. Instead, lenders may accept Business Activity Statements, business bank statements, or a signed income declaration. Low doc loans usually come with higher interest rates.
LRBA (Limited Recourse Borrowing Arrangement): The structure used when a Self-Managed Super Fund borrows to purchase an asset. Under an LRBA, the asset is held in a separate bare trust during the loan period. The lender's recourse in the event of default is limited to the asset -- they cannot claim the other assets of the SMSF.
LVR (Loan-to-Value Ratio): The ratio of your loan amount to the value of the property, expressed as a percentage. An LVR of 80% means you're borrowing 80% of the property's value. Higher LVR loans may trigger Lenders Mortgage Insurance (LMI) or attract a higher interest rate.
Negative Gearing: When the costs of owning an investment property exceed the rental income it generates, resulting in a net loss. In Australia, this loss can be offset against other income, reducing your overall tax liability. A common strategy among property investors who expect capital growth to outweigh short-term losses.
Offset Account: A transaction account linked to your mortgage where the balance is offset against your loan principal when calculating interest. If you have a $500,000 loan and $50,000 in your offset account, you only pay interest on $450,000.
Principal and Interest (P&I): A repayment structure where each repayment covers both a portion of the loan principal and the interest charged. P&I repayments mean the loan balance reduces with each payment. Most owner-occupied home loans are P&I. Contrast with interest-only loans, where repayments cover only the interest.
Serviceability: A lender's assessment of whether you can afford to repay a loan based on your income and existing debts. Lenders apply a serviceability buffer -- typically 3% above the current interest rate -- to test whether you could still meet repayments if rates rose.
SMSF Loan: A loan used by a Self-Managed Superannuation Fund to purchase an investment asset, structured as a Limited Recourse Borrowing Arrangement (LRBA). The lender's recourse in the event of default is limited to the asset purchased, not the other assets of the fund.