Application Fee
Banks and lenders all have their own fee structure, as well as the interest rate charge. The Application Fee is a fee that lenders charge borrowers to assess their loan and whether it will be approved.
Arrears
If a mortgage payment is missed, the mortgage goes into arrears. Essentially, Arrears is the amount overdue against the repayment schedule.
Bridging Finance
Sometimes there is a bit of a time difference between buying a new property and settlement on your current property. Bridging Finance is a short-term loan that covers this gap. It often comes with a higher interest rate and requires the unconditional sale contract on your existing home /property.
Certificate of Compliance
Mortgage lending requires that the secured property adheres to building regulations. A Certificate of Compliance is obtained from the Council and is statement that the buildings are compliant with current building regulations.
Equity
This is the amount you own. So if you buy a home/ property for lets say $400,000 and you need a mortgage of $320,000, then the equity is $80,000. Of course, your equity increases over time with each mortgage repayment.
Establishment Fee
Some, but not all lenders will charge an Establishment fee, which is a fee to set the loan up.
Fixed Interest
New Zealand is pre-dominantly a fixed rate mortgage-environment . This means you choose an interest rate for a fixed period of time for example, one year, two, three or more. During that period the interest rate will not change as it does with Variable rates. However, it is important to be confident that you will want to keep the mortgage for at least a good share of the period as penalties can apply should you want to change before the end of the term.
Gearing
You may have heard the terms positive gearing or negative gearing. Basically, this is the ratio of your own money against the amount you have borrowed. If you own $120,000 and have lending of $200,000, then your property is negatively geared. But then over time as your mortgage repayments increase your equity, the scale tips and you become positively geared – for example when you own $200,000 against remaining lending of $120,000.
Guarantee
Sometimes lenders will require that someone other than the purchaser of the property provides a guarantee. Essentially this is a commitment that they will pay the mortgage repayments should the borrower be unable to.
Interest Only Loan
An Interest Only Loan is where the borrower only pays the interest accumulated by the lending. In these cases, the loan amount does not reduce as no principle repayments are being made. So for example, if a borrower took out a mortgage of $395,000 in 2011 on an interest-only basis, they would pay monthly interest for having the finance, but the loan amount today would still be $395,000. Often these loans are short term say one to five years and are paid in full at the end of the term, or re-negotiated.
Liabilities
Liabilities are the debt we carry – for example other loans, credit card balances etc. However Liabilities can also relate to something such as a guarantee being activated (for example, if you have guaranteed someone else’s borrowing). This is referred to as Contingent Liabilities.
LVR (Loan to Value Ratio)
If you purchase a property valued at $450,000, with a deposit of $90,000, then your LVR would be 80% (or the amount borrowed in this case is 80% of the total value of the property).
Mortgage Broker / Mortgage Adviser
The process of getting a home loan can seem complicated to many clients, and much of my role while working as a mortgage broker was educating clients on what they could do, what the process was (from looking for a home, putting in an offer, to arranging the finance), and finally making recommendations on the loan structure and term based on the clients situation.
They will meet with clients to understand what they are wanting to achieve with regards to home finance, debt consolidation, and/or insurance requirements.
Once they have all this information the mortgage broker will be able to determine whether the clients are eligible for a loan, and as not all lenders requirements are the same, who is likely to give them a home loan.
The current interest rates on offer at banks will be a big factor, but not the only factor, in the mortgage broker’s analysis of the best home loan offer for the client. The mortgage broker will work with the client to determine an appropriate loan structure, taking into account the clients current and expected future (changing occupations, family circumstances etc) financial situation and recommend an appropriate lending structure and insurance requirements based on these circumstances.
A mortgage broker can potentially save clients tens of thousands of dollars during the life of their loan by negotiating on home loan interest rates, structuring the loans appropriately for the clients situation, negotiating bank charges, recommending products to best fit the way they manage their money, and providing a regular review of the clients situation.
The process is often described as the 6-Step process, and is common for Mortgage and Insurance advisers, as outlined in the diagram below and covered in the Professional Adviser Association’s Advice Process (attachment 1a).
Mortgagee
Commonly called banks or lenders, the Mortgagee is the company lending the money to purchase the property.
Principle
The figure you come up with after working out your savings (or how much deposit you can afford to provide) against the sale price of the property. It’s the amount you borrow.
Principle and Interest
Principle is – as described above – the amount you have borrowed, and interest is the cost of that borrowing (i.e. the interest rate the lender charges). With a Principle and Interest loan, each month (or other frequency for example fortnightly), your mortgage repayments consist of interest charged for the finance and principle – an amount which reduces the total borrowed.
What is a Priority Amount?
A Priority Amount is an amount up to which the funder’s lending will rank before any subsequent lender’s funds, and is put in place firstly to protect the lender.
This amount becomes important when a property is placed for mortgagee sale by the lender.
Revolving Credit
In relation to mortgages, Revolving Credit essentially means that you have a loan (or often called facility) limit and you can access or pay it down at any time. Borrowers who opt for this this type of lending often have their entire salary paid directly to the loan to reduce interest and use credit card facilities for monthly expenses. Of course if you choose this strategy, it’s important to ensure you pay the monthly credit card balance with the Revolving Credit loan or other funds before the credit card is due, to avoid interest charges. It’s a line of credit really, affording you the ability to access or pay-down the loan at any time.
Security
Often Security is the property the lending is borrowed for. Essentially Security is an asset of the value of the loan that ensures the lender can recoup the amount borrowed in need.
Settlement Date (or Drawdown date)
This is the day the keys change hands; the date that the new owner takes possession of the property and finalizes payment. It can also be called Drawdown date as this is the time at which the approved lending is accessed.
Valuation
This is a report giving a view of the value of the property. Valuers are employed to review a property; its location; structure etc and assess what the market would pay for the property. All lenders require a Valuation on the property to evaluate the lending and often have their own valuation requirements.
Variable Interest Rate (also called the Floating Rate)
Unlike a fixed rate, a Variable Rate changes during the loan period. This is driven by changes in the marketplace and the funding environment. An advantage of a Variable Rate is that borrowers can benefit from rates coming down without having to re-fix their loan (as is the case when on a fixed rate at a fixed term). However the opposite is also true and Variable Rates do not provide protection from interest rates increasing.
Disclaimer: The above list of Mortgage Jargon is not a complete list of terms and should not be used as advice. Care has been taken to ensure that the definitions are accurate, however no person should rely on this information without obtaining professional advice.