When it comes to loans and mortgages there can be a lot of jargon, which can be both confusing and daunting. Here, we explain some of the most common terms for you.
A loan designed to bridge the time between purchasing a new home and selling your current home.
This is the amount that you put towards the purchase of your home. Banks and lenders generally like for there to be a 20% deposit. Your deposit can come from a variety of sources (cash savings, kiwi saver funds, family gifting etc.) and the banks all like to see that at least 5% of the purchase price has been accumulated from genuine savings.
When your home loan has been repaid the bank will discharge the mortgage that it holds over your property. This generally happens when you have sold your property in which case your solicitor will arrange for the mortgage to be discharged so that the new owner can have the property transferred into their name & their mortgage (it there is to be one) registered.
Drawdown. This is the date when your purchase of the property was settled by your solicitor. This is also the date when your loan begins to accrue interest and is the date used to calculate interest and repayments.
If you take away the amount owing on your home loan – and any other debts you may have secured against it from the property’s current market value. This remaining amount is known as your equity.
Means the interest rate won’t change for a set period of time.
Many lenders in New Zealand will provide a rate lock facility whereby you can lock in a rate for a drawdown that is going to occur at a future date.
In New Zealand fixed rates for loans are for terms between 6 months and 5 years. Once the fixed interest period is agreed then your repayments will remain exactly the same for the term of the fixed period.
All lenders provide a floating or variable rate option. This is a rate that the lender sets from time to time and which as suggested in the title can go up or down depending on the state of the market. If the floating rates are to be varied in any way it is up to the provider to advise you of the change.
Freehold is the most common kind of property ownership in New Zealand. Other types are Cross-lease or strata title and generally are used for multiple properties on one site. If you own a freehold property, it means that you own both the land and anything built on that piece of land – unless there are legal restrictions on the property – such as covenants, easements or restrictions under the Resource Management Act 1991. Sometimes freehold property is also referred to as ‘fee simple’ ownership. Often people use the term “I own my property freehold” when they actually mean that they have paid off the mortgage against their property.
A guarantor is someone who provides a guarantee that if the primary borrower is unable to pay all the loan or if they are unable to meet the repayments for the loan and in fact default on their repayments then the guarantor will be called upon to make good the payments. It is always best to understand this situation completely and so for this reason you should always seek independent legal advice before guaranteeing any loan for anyone.
Instalments are the same as loan repayments. Usually these are either weekly, 2 weekly or monthly.
When you borrow money interest is charged on the amount outstanding, usually on a daily basis. Interest rates are based on an annual percentage.
This is the total number of years it will likely take you to pay off your loan. In NZ, this is up to a maximum of 30 years. The nearer a borrower gets towards retirement age the shorter the loan repayment term is likely to be. The calculation is done at the approval time of the loan to ensure that generally when you retire from work your property will no longer be subject to a mortgage.
If you are purchasing a property for $800,000 and have a 20% deposit ($160,000) then the loan to value ratio is 80% ($640,000/$800,000). In essence it describes the percentage of the market value that the lender is providing by way of loan or the equity you may have in your property.
The term mortgage is often used by people when in fact they mean home loan. A mortgage is actually the legal document that links your home loan to the lender, providing them with a legal security over the property. In the event that you stop making the required repayments your lender has the right to demand that you get your repayments up to date and if you don’t comply, they have the legal right to sell the property to recover the monies that they have lent.
The borrower of the home loan.
If a borrower can’t pay their mortgage, then mortgagee can sell the property to get their money back.
The total amount you borrowed. These amounts you repay regularly are usually made up of both principal and interest.
These are the amounts (established at the time your loan is drawn down) that have to be made at a agreed regular rate (weekly/2 weekly/monthly) in order to reduce and clear the loan over the term of the loan.
Your mortgage facilities may include a transactional account that works like an overdraft. It has an upper limit but you can operate that account up to the amount of the limit and pay interest only on the amount that is actually drawn each day. There are no set repayments for these facilities so good money management is important to ensure the overall debt reduces with time.
This is the value that the lender attributes to your property. This is often set by completion of a Registered Valuer’s report and valuation, or from the most recent sale price of the property often referred to as the Current Market Value.
A table loan is a loan for which the repayments include interest and principal and where the repayments stay the same for the entire term of the loan (providing the interest rate remains the same). At the commencement of the loan the interest component is usually the bigger portion of the repayment and the principal reduction the lesser. Eventually the figures are reversed and the principal repayments become the bigger portion and the interest the lesser.
The term of a loan is often expressed in years and it refers to the approved period that the loan has been calculated and assessed over. It can also refer to the length of time that fixed interest period will apply to.
Also known as floating interest rate. It’s an interest rate that can go up or down.
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