Banking Terms You Want to Know

Adrian Foong February 16, 2012 2

Banking is tough enough without its insanely confusing jargon. If you’re looking to buy a house, we’ve compiled a list of good to know terms to make your life that little bit easier:

Assets

Anything you may possess which holds monetary value will be calculated as an asset. Any debt a debtor may owe you will be counted as well. All your investments will also be added to your assets, which include bonds, stocks, CDs or any business you may own.

Net worth

To calculate your net worth, you have to subtract any outstanding debt you may have from your assets. In fact, someone may have billions of dollars in assets but have a negative net worth. This is why net worth is often viewed as the most accurate measure by which wealth can be calculated.

Compound interest

Only a few people truly understand how compound interest works. Compound interest is interest that will be calculated not only on the initial capital but on all the interest that has been earned. For debtors, that means your debt will grow quicker since not only will you have to pay the principle, but also all the interest it has gathered over the term. If you’re a saver on the other hand, compound interest is a great thing since you’re investment will grow quicker than if you only collected single interest.

Fixed Rate loan

A fixed rate loan will be loan on which the interest rate will stay the same during the whole term of the loan. This is a great thing if interest rates are on the rise, but if you’ve contracted your loan at a period when the interest rates were particularly high, you might regret your choice if there’s a sudden drop in interest rates.

Floating/Variable Rate loan

A variable rate loan is a loan on which the interest rate will fluctuate depending on the current interest rate movements. A variable rate is not always the best idea when you’re contracting a long term mortgage on your home since you can never tell in which direction the interest rate is going to go in the future. However, if your loan is for a smaller property in which you only intend to stay for a couple of years, a variable rate can be a great option for you if the current interest rates are good.

Annual Percentage Rate

The annual percentage rate, or APR, is the interest rate that you’ll have to pay on your loan every year. While the APR is one of the first thing you should look for when you’re shopping for a loan, you should also consider other costs, such as any application fees, closing fees, early repayment penalties or any other fee that might be involved with your loan.

Prime Rate

A lot of people get confused by the term “prime rate”. A lot of lenders will wave theirprime rate in front of borrowers to lure them into thinking that they’ll be able to get this rate on their loan. The truth is that the prime rate is only reserved to select customers and the requirements to qualify for the prime rate are very high in most cases. The prime rate is basically the rate that is offered to customers a certain institution deem most important. That means that if you don’t have a long standing relationship with a bank and your credit score is average at best, you probably won’t qualify for their prime rate

Letter of Offer (LO)

A contract between the borrower(s) and the bank stating the terms of the housing loan package.

Loan Tenure

The period of time that you will take to fully repay your loan.

Lock-in Period

The number of years that you are tied to your lender. If you fully redeem your loan within this period, there will be a full redemption penalty that is equal to a percentage of your loan quantum. Lenders may also charge a penalty for making partial payments within this period.

Base Lending Rate

Base Lending Rate (BLR) is a minimum interest rate based on a formulated calculation that includes the financial institutions’ cost of funds and other administrative costs. The BLR is almost always the same amongst major banks.

Loan Quantum

The loan quantum or principal is the amount of money that you borrow.

Full Installment Repayment

means that the instalments cover both principal and interest payable.

Interest Only Repayment

covers only the interest portion of the loan.  The principal loan remains unpaid during this period.  Mortgage packages which offer interest-only repayment will usually have to revert to full instalment repayment at some point, so that the principal loan is repaid.

Bridging Loan

Banks offer up to 10% of the purchase price or valuation, whichever is lower, to meet the initial downpayment for a property purchase. Generally you will only need to service interest on the Bridging Loan. Bridging loans are for period of up to 6 months only.

Now, go knock yourself out with mortgage payments.

 

Information sourced from various websites, including OCBC and smartloans.my.