Below is a list of common mortgage terms which will help buyers and investors understand the finance journey. This list is taken from “The Successful First Home Buyer” book.
The advertised price in the marketing for a home. This is typically for a tender sale. Auctions don’t usually advertise the reserve or asking price.
You expect (and often rely) on a regular invoice being the same every month. Bill shock happens when that regular invoice is significantly higher. An example of this might be a phone bill that is usually between $100 to 150 per month, and suddenly jumps to $600 one month.
A group, typically made up of the owners of units in a block of flats or apartments, that oversees the shared spaces in the building, and also the running of the building, including maintenance and compliance. The regular body corporate fee paid by the owners of the units fund this service.
A report, either written or verbal, from a builder who has inspected the home. This report is not usually required by a bank unless a problem has been identified in the Sale and Purchase Agreement.
Code of compliance certificate (CCC)
This is a certificate that is part of the Land Information Memorandum (LIM) report; it shows that the home complies with the Building Act.
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.
A type of ownership where there is more than one unit on the land. There will be a plan (called the Flats Plan) 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. It is important for a lawyer to be involved early so they can look over the lease.
Debt-to-income ratio (DTI)
The percentage of the mortgage covered by your combined income.
The ability to borrow more money is limited by the amount of deposit (savings, equity or gifts). To increase the amount of borrowing, the deposit needs to be increased.
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.
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 would usually make use of a fixed interest rate loan because the interest rate does not change.
Floating interest rate account
This loan is the opposite to a fixed interest rate loan. You can pay off the money at any point. To mitigate for this ability, the bank charges a higher rate. The floating rate can also move up or down (often, but not always, 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).
A document which 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.
This is the amount that most people think of as ‘their salary’. Usually, if someone tells you that they earn $53,000 per annum, 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 Kainga 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 certain purchase and income criteria.
The ability to borrow more money is limited by the amount of income of the applicants. To increase the amount that can be borrowed, income needs to be increased.
Interest-only payments pay the interest on a mortgage but do contribute anything toward the principal. This means that the mortgage is not reducing over time.
This is the payment made for borrowing money. If you agree to borrow $1,000 from a bank at 5% per annum, then 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 withdraw, under significant financial hardship or upon retirement.
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 normal payments – taxes, child support, IRD arrears, student loan, 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 get in the habit of thinking of your money in terms of net income. The transition from $53,000 salary to a net income of $41,700 can be tough to swallow at first, but it will go a long way to understanding why you earn ‘so much’ and can save so little.
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 cash to pay every last debt you had – student loan, credit card debts, store cards, how much would you have left? You would be surprised and a little disturbed at the number of people that have a negative number. In other words, if they sold everything for cash, they could not pay off all their debts.
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.
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.
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 the principal payment. After the first payment, you will only owe $99,945 (i.e. you have paid $55 off your mortgage).
Similar to 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%).
The most in-depth version of a valuation for a property. A registered valuation involves a licensed valuer inspecting the property inside and out and providing an estimated value of the property in a written report. The report will also include comparable sales in the area. Since 2017, all registered valuations must be ordered through the bank system so that no guidance can be given to the valuer around the desired value.
The price 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 which is typically higher than a fixed rate.
The amount of variability (increases and decreases in return) that 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 upon unconditional acceptance, obligates a buyer to buy and a seller to sell.
The date that the purchaser’s lawyer pays all required funds over to the vendor’s lawyer. The vendor’s lawyer, in turn, transfers legal Title of the home over to the vendor. Following this step, the purchaser is notified and typically receives the keys to their new home.
When buying by tender, a process of private and confidential offers are made and there is a set deadline, after which the vendor selects their preferred offer.
The Title, or Certificate of Title, is the legal description of a property. It provides proof of the legal ownership of the property and also any interested parties such as a bank that holds a mortgage.
Sometimes called discretionary expenses, are expenses that fluctuate from month to month.
The name given to the seller of the property. Not necessarily the owner because the bank may own a high percentage of the property. If you are a first home buyer, you are usually referred to as the purchaser and you are buying from the vendor.