A glossary of common mortgage terms

Date Published: 7 October 2020

Below is a list of standard mortgage terms to help buyers and investors understand the finance journey.  This list is taken from “The Successful First Home Buyer” book.

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Asking price

The advertised price in the marketing for a home. This is typically for a tender sale. Auctions don’t usually promote the reserve or asking price.

Bill shock

You expect (and often rely on) a monthly invoice to be the same each time. Bill shock happens when that regular invoice is significantly higher. An example of this is a phone bill that is between $100 – $150 per month and suddenly jumps to $600 one month.

Body corporate

A group that typically comprises the owners of units in a block of flats or apartments. This group oversees the shared spaces in the building and the running of the building, including maintenance and compliance.  The regular body corporate fee paid by the owners of the units funds this service.

Builder’s report

A written or verbal report from a builder who has inspected the home. A bank usually requires this report only if a problem has been identified in the Sale and Purchase Agreement.

Code of compliance certificate (CCC)

This certificate is part of the Land Information Memorandum (LIM) report; it shows that the home complies with the Building Act.

Conservative fund

A fund, in this case, KiwiSaver, that has its money invested in low-risk assets. These funds are unlikely to lose significant value in a share market crash. Often comparable to a term deposit in returns.

Cross lease

A type of ownership where there is more than one unit on the land. A plan (called the Flats Plan) will be attached to the Cross-lease Title, which will give the outlines of the buildings. All owners co-own the land and have leases on their property. Although this is a more complex form of land ownership, banks are typically OK with lending against them. A lawyer needs to be involved early to review the lease.

Debt-to-income ratio (DTI)

The percentage of the mortgage covered by your combined income.

Deposit hurdle

The ability to borrow more money is limited by the deposit amount (savings, equity or gifts). To increase the amount of borrowing, the deposit needs to be increased.

Equity

In property, the amount of the house that does not have a mortgage over it. So a $500,000 house with a $350,000 mortgage has $150,000 worth of equity.

Fixed expenses

Payments that occur regularly – every month, fortnight or week – and are the same or almost the same amount each time.

Fixed interest rate loans

With a fixed-interest rate loan, a certain amount of lending is promised to a bank for a certain amount of time. In other words, you are saying: ‘I promise to borrow $x for this length of time’. Usually, this term would be between six months and five years. In return, the bank will give a lower rate. The discount is approximately 1 to 1.5% off the floating rate.

In a market where interest rates are flat or likely to go up, most people usually opt for a fixed-interest rate loan because the interest rate does not change.

Floating interest rate account

This loan is the opposite of a fixed-interest rate loan. You can pay off the money at any point. To mitigate this ability, the bank charges a higher rate. The floating rate can also move up or down (often with the official cash rate).

In a market where interest rates are likely to go down, mortgages are often switched to floating, so they can reduce as the interest rate at the bank goes down. This strategy only works if the interest rates are due to fall further than the fixed interest rate loans (so 1 to 1.5% expected drop in interest rates).

Gifting declaration

A document that confirms that some or all of the money being used as a deposit is a gift, not a loan. This document should also confirm that the gift cannot be demanded back at any time.

Gross income

This is the amount that most people think of as ‘their salary’. Usually, if someone says they earn $53,000 annually, this is their gross income. It is the amount before tax, student loan deductions, KiwiSaver, child support etc.

First Home Grant

A grant provided by Kāinga Ora to first home buyers, intended as a boost to help first home buyers with their deposit. It does not need to be repaid but is only available if you meet specific purchase and income criteria.

Income hurdle

The applicants’ income limits their ability to borrow more money. Income needs to be increased to increase the amount that can be borrowed.

Interest only

Interest-only payments pay the mortgage interest but do not contribute anything toward the principal. This means that the mortgage balance will stay the same over time.

Interest payments

This is the payment made for borrowing money. If you agree to borrow $1,000 from a bank at 5% per annum, your interest costs will be $50 per year.

KiwiSaver significant financial hardship withdrawal

A function that allows your KiwiSaver money to be withdrawn if you are experiencing severe financial hardship.

Land Information Memorandum (LIM) Report

A report or collection of reports compiled by the council. It should include all the alterations that have been permitted for the home.

Loan-to-value ratio (LVR)

The percentage of your home that has a mortgage over it.

Member tax credit

A tax refund from the government for putting money into your KiwiSaver. The refund is also placed into your KiwiSaver and is not accessible except under the first home withdrawal, under significant financial hardship or upon retirement.

Net income

To those unfamiliar with accounting, this may be a confusing term. Think of it this way: net income is the amount of money that lands in your bank account once all other regular payments – taxes, child support, IRD arrears, student loans, KiwiSaver, etc. – are taken out. It is your ‘in-hand income’.

Even though gross income is the most quoted earnings amount – ‘I earn $53,000 per year’ – try to think of your money in terms of net income. The transition from a $53,000 salary to a net income of $41,700 can be tough to swallow initially, but it will go a long way to understanding why you earn ‘so much’ and can save so little.

Net worth

If you add up the value of all your belongings, assets (cars, boats, etc.), investments (shares, KiwiSaver) and savings (money in the bank), and then minus all the debts you owe, this is your net worth.

In other words, if you changed everything you owned to cash – KiwiSaver, furniture, clothes, businesses – and used the money to pay every last debt you had – student loan, credit card debts, store cards, how much would you have left? 

Owner occupied

A category the bank uses to define how your property is used. An owner-occupied property must be lived in by some or all of the guarantors of the mortgage.

Per annum

Latin for per year. Most interest rates are quoted per annum, or in other words, how much interest you will pay per year. Some less reputable finance companies quote what looks to be a low-interest rate that turns out to be a per-week rate.

Principal payments

Most mortgage payments have an interest component and a principal component. A mortgage of $100,000 might have fortnightly payments of $247. Of this, $192 will be the interest payment, and the remaining $55 will be the principal payment. After the first payment, you will only owe $99,945 (i.e. you have paid $55 off your mortgage).

Rate shock

Like bill shock – rate shock occurs when your spending patterns are set around a certain interest rate (e.g. 5%), and the interest rate suddenly jumps (e.g. 7%).

Registered valuation report (RVR)

The most in-depth version of a property valuation. An RVR involves a registered valuer inspecting the property inside and out and then providing an estimated property value in a written report. The report will also include comparable sales in the area. Since 2017, all RVRs must be ordered through the bank system so that no guidance can be given to the valuer around the desired value.

Reserve price

The price is set as the lowest acceptable by the vendor for a home sold at auction.

Revolving credit account

A transactional account that allows you to deposit money in (and therefore reduce your mortgage) with the ability to withdraw that money again easily. The interest rate is a ‘floating’ rate and is typically higher than a fixed rate.

Risk tolerance

The amount of variability (increases and decreases in return) someone is willing to accept in their investment. Someone with a high-risk tolerance is looking for high returns with the understanding that the dips in returns may be there too.

Sale and Purchase Agreement

A legal contract that obligates a buyer to buy and a seller to sell upon unconditional acceptance.

Settlement date

The date that the purchaser’s lawyer pays all required funds over to the vendor’s lawyer. The vendor’s lawyer, in turn, transfers the legal title of the home over to the purchaser. Following this step, the purchaser is notified and typically receives the keys to their new home.

Tender

When buying by tender, private and confidential offers are made within a set deadline. After which, the vendor selects their preferred offer.

Title

The Title, or Certificate of Title, is the legal description of a property. It provides proof of the property’s legal ownership and any interested parties, such as a bank holding a mortgage.

Variable expenses

Sometimes called discretionary expenses, these are expenses that fluctuate from month to month.

Vendor

The name given to the seller of the property. Not necessarily the owner because the bank may own a high percentage of the property.

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