Home Loan Basics

We admit it, there’s a lot of bank speak and jargon when it comes to home loans and buying a home. As much as we try to avoid it, it just keeps popping up.

What’s the difference between freehold and leasehold, is it a mortgage or home loan and aren’t wages and salary the same thing?!

Commonly used home loan terms

We’ll do our best to explain the most common terms you may come across, but if you’re still not sure about anything, just ask by sending us a message or by giving us a call for an explanation.

For now, have a look below at the most common jargon and bank speak we’ve come across:

Amortisation:

This is the process of reducing or repaying the balance of your home loan via regular payments. Repayments on an amortising home loan will have a portion of the repayment go towards the interest cost and a portion towards the principal balance owing.

Asking Price:

This is the price a property is listed for. Often this is not the final sale price as the vendor may be willing to negotiate.

Assessed Value:

The dollar value assigned to a property. The value is obtained by a registered valuer completing an in-depth review of the property. The assessed value can be found in the written valuation report completed by the valuer.

Assets:

These are items which have a cash value. Examples of the most common asset types are bank savings, KiwiSaver, vehicles, superannuation, shares, term investments and contents.

Appraisal:

Also known as a Comparative Market Analysis (CMA), this provides a relevant review of the value of a property and is generally provided by a Real Estate Agent as part of the process to market and sell a home. It will note recent comparable sales in the area, based on several factors such as land and house size, including the number of rooms, bathrooms, location, quality, and current council valuation.

Balloon Payment:

This is a loan payment outside of the normal regular payment schedule and is normally a larger amount than the normal payments. For interest only loans, there will be a balloon payment at the end of the loan term of the full borrowed amount, plus any accrued interest.

Break Fee:

Also known as an 'early repayment fee' or a 'pre-payment fee', this applies when you repay part of or all of your fixed-interest rate home loan before the fixed rate period has ended. If your home loan is on a fixed interest rate, lenders will generally allow a borrower to repay up to 5% of the principal amount each year without incurring a break fee. Please contact the Tella team about break fees and individual bank or lender policy if you’d like more information specific to your situation.

Bridging Loan:

These are short term home loans used to cover the financial gap between buying a new property and selling your existing property. Bridging loans are normally on a floating interest rate, which is generally higher than fixed interest rates, however it gives the borrower the flexibility to repay the home loan when their property sells.

Body Corporate:

An administrative body made up of all the owners within a group of units or apartments of a strata building. The owners elect a committee, which handles the administration and the upkeep of the building and property. Body corporate fees are usually paid to the committee for services required on an annual basis. These fees increase annually with inflation, and it is always recommended that you understand the long-term maintenance plans of your unit or apartment complex before purchasing, as this will give you an indication of the extra costs that you may incur in the future.

Building Code:

Refers to the regulations under the Building Act 2004 and governs the building sector. It sets out the rules for the construction, alteration, demolition, and maintenance of new and existing buildings in New Zealand. Even if a building consent is not required for work done on a property, all work must still comply with the regulations of the building code to ensure that your property is safely constructed and will be healthy to use and live in.

Boundary:

The lines that define the perimeter of your property. Details for measurements of a boundary can be found on your property title. This will be particularly important for example, if you’re putting up a fence or gate on your property, as it should be built on the boundary line or as near to it as practicable.

Caveat:

A warning on the title of a property that a third party might have some interest or a right to the property. This means that the owner of the property is not able to transfer the mortgage or have any other dealings with the land without the caveator's consent.

Closing Balance:

A total of all balances and costs required to close an account or loan. This would include any remaining loan balance, all interest accrued and any other applicable charges or fees (think monthly maintenance fees, account fees, service charges and administrative charge fees). This is also referred to as a settlement statement.

Code Compliance Certificate (CCC):

A document issued by your local council. For a new build, this confirms to the builder or developer, permission for the recent build to be occupied. This indicates that the building follows public health and current building codes. If it’s a renovation that requires consent, the process is similar but is issued to the current homeowner after passing final inspection and after proof of payment of council fees.

Conditional Approval:

A preliminary offer from a bank or lender on the amount they will lend you, with final acceptance contingent on the confirmation of certain criteria, such as the property, or additional documents you need to provide them with. Examples of conditions on a home loan approval are closure of existing unsecured lending, reduction in credit card limits, obtaining a registered valuation or proof of deposit funds to be confirmed.

Construction Loan:

A construction loan is a loan used to finance the cost of construction or major structural renovation of a home. There are different types of construction loans, which include turn-key (where a home loan is given on completion), build only and major renovations which requires council consent. These all have specific requirements and policy that applies throughout the process, from obtaining the approval right through to paying the money for the work being done on the property. The Tella team can help you through any questions you may have regarding obtaining a construction loan, just message or call us for more information.

Capital:

The accumulated money and/or assets of a person or business. When the amount of debt is known, the capital or assets owned by an individual provides insight into their net worth and ability to draw from or support their ability to maintain a home loan. This plays an important part in the home loan application process as the lender or bank will want to know how a clients capital / assets stack up against their liabilities.

Chattels:

Moveable and removable items of personal property. In real estate transactions, chattels included in the sale of a home usually include the stove, television aerial, carpets, blinds, curtains, and light fittings. However, unless chattels are specified in the sale and purchase agreement, they are not sold as part of the property.

Credit Report:

A file of a loan applicant’s payment history prepared by a credit agency and used by a lender to determine how suitable they are for a loan. All banks and lenders will obtain a credit report when assessing your home loan application. A credit record includes the payment history for any loans and credit such as credit cards, car finance, hire purchases, and may include your utilities. It also details the types of loans you currently have and makes note of any defaults and missed payments you have had on your accounts.

Cross Lease:

When owning or purchasing a cross lease property, you will own part of an underlying share in the original freehold title, and lease back exclusive use of the area where the house is from the other owner/s. This lease is generally up to 999 years.

Capital Gain:

This is the increase in value of a property or investment. The profit is locked in when the asset is sold. You can work out your capital gain by subtracting the purchase price (price you originally bought the property for) from the current value of your property. Depending on the circumstances around the purchase (eg. length of time owned), there may be a tax on this capital gain; this is covered in the bright-line rule.

Certificate of Title:

A description of a property detailing the name of the registered owner and any encumbrances (such as mortgages or easements) on the property. As part of your pre-purchase checks (due diligence) you and your solicitor would review the certificate of title to understand the rights and restrictions that may apply to ownership of this property.

Covenant:

A rule placed over a property that restricts how you can use the land and property. The covenant can be found on the certificate of title.

Crown Property:

Land and property owned by the Government, including forest lands, lakebeds, riverbeds and pastoral lands.

Consolidation:

In the context of debt consolidation, this refers to combining all existing debts together into one loan. This is often done to be able to better maintain (ease of making on repayment) or benefit from an improved interest rate. For example, credit card interest rates and personal loan interest rates are usually above 12% p.a., whereas a home loan rate is around 5-6% depending on how you choose to fix your loan’s interest rate.

DTI or TDTI (Debt-To-Income ratio):

A ratio used to measure the serviceability or affordability for a borrower(s) to have a home loan based on borrowing compared to their total gross income. DTI is calculated in the following manner: Total Debt/Total income = Total Debt To Income. For example, if you have a home loan of $650,000 and a combined income of $130,000, your DTI is $650,000 divided by $130,000 = 5x

Dual Key:

Sold under the same title, dual-key apartments (twin apartments) commonly have a studio apartment on one side and a one or two-bedroom apartment on the other. There are no common facilities between them, and each apartment has its own entrance.

Dual Occupancy:

This is defined as a block of land zoned for the construction of two distinct dwellings as permitted by the Local Territorial Authority.

Disbursements:

A payment made by a solicitor which is then claimed back from the client. Examples of what a solicitor may claim are for title searches, or lodging new owners with Land Information New Zealand, or if they ordered a LIM report from the council on your behalf.

Drawdown date:

The date when you receive the loan amount requested from the bank. This often occurs on the same day as a property settlement and allows you to complete the purchase.

Duplex:

Also known as semi-detached, this is a property type where two buildings are attached by a common wall.

Easement:

A right that someone has, to use the land belonging to another, eg: a water authority may have a sewerage easement across part of your property.

Equity:

The difference between the market value of the property and the amount that is still owed on its mortgage. For example, if you own a home valued at $900,000 and you have a home loan of $500,000, then you have $400,000 in equity in the property.

Encumbrance:

An impediment to the use or transfer of the property in the form of an interest or right in the property.

First Home Loan:

A home loan product offered by selected NZ banks and loan providers, allowing borrowers to buy their first home for a smaller deposit of 5% instead of the standard 20%. This product is underwritten by Kāinga Ora, allowing banks and loan providers to lend a borrower more for their desired property.

First Charge Registered Mortgage:

A bank or lender’s priority interest in a property used to secure your home loan. This interest can be found on the certificate of title.

Fixed Interest Period:

A specific period of time which the interest rate on your home loan is locked in for. It generally ranges from 6 months to 5 years. Also known as fixed term.

Fiduciary:

A person such as a real estate agent or salesperson who has a duty to act primarily in the interests of and for the benefit of the person who employed them. In the case of a property sale, the real estate agent has a fiduciary duty to the vendor.

Fixed Rate Home Loan:

A home loan with an interest rate that does not change for the chosen fixed period selected.

Freehold:

Also known as fee simple, this is a legal term describing the type of ownership that applies to a property. In terms of freehold, this means that the owner can freely make any changes to the property (subject to any council bylaws and consent requirements) as he or she wishes. This is compared to a more restrictive unit title or cross lease title. It is the greatest possible interest a person can have in real estate.

Gross Income:

An amount of income (eg salary or wages) before taxes are deducted.

Hardship:

Difficulty repaying your debts long term, on an ongoing basis by its due date. When experiencing hardship, your bank or lender may be able to help you by restructuring your loan or by offering you a repayment holiday. There are other ways to assist and prevent hardship, including sale of assets, property and applying for a withdrawal from your KiwiSaver.

Interest Only Loan:

A specific loan where only the interest is repaid over the course of the loan. The original amount is repaid at the end of the loan term or rolled over to principal and interest repayments.

Investment Property:

A property that the owner does not live in but provides an investment return to the owner through renting or leasing to a tenant.

Insolvency:

A term used when describing an individual or company that is under financial stress and cannot pay its debts when due, or the debt is more than the total value of the assets. Insolvency can lead to bankruptcy.

Joint Tenancy:

A form of co-ownership that gives each tenant equal shares and rights in the property including the right of survivorship, e.g. on the passing of one owner, ownership of their share of the property passes to the surviving owners.

Kāinga Ora First Home Grant:

A one-off payment from Kāinga Ora, NZ government's housing agency, to help get first home buyers into their home.

KiwiSaver:

A voluntary saving scheme designed to help set you up for retirement, where you can make regular contributions from your pay directly to your provider. It can also be withdrawn for the purchase of a first home loan.

Leasehold:

The building (or unit) and other structures on the property are owned by one owner, but the land is owned by someone else. When purchasing the buildings, you purchase the exclusive use of the land for a certain period. You pay rent to the landlord for the land.

Lessee:

Also known as a tenant. A person who has rights to use a property through the terms of a lease.

Lessor:

Also known as a landlord. They are the owner of a property that is leased to another person, the lessee, or tenant.

Liabilities:

These are debts owed such as credit cards, store cards, personal loans and other unsecured loans/lending taken out and still owing. When applying for a home loan, you will be required to disclose the liabilities you have as this will be factored into servicing calculations for the loan.

Lien:

A legal claim against a property that must be paid off when/before the property is sold.

LIM Report (Land Information Memorandum):

A summary of specific information held by a council on a property. It may include information on the risk of erosion, subsidence or slippage and flooding, the presence of hazardous substances, the location of private and public stormwater and sewerage drains and any overdue rates on the property.

A real estate agent may have this available for prospective purchasers. If they do not, you can request one directly, or indirectly via your solicitor, from the council. Reviewing the LIM report is part of the due diligence process you go through when purchasing a property.

Loan:

A sum of borrowed money that is generally repaid with interest.

Loan Application Fee:

A fee paid to a lender for processing a loan. Also known as an establishment fee.

Loan Term:

The length of time you have to repay the loan, this is generally offered from 6 months up to 30 years by most New Zealand banks and lenders.

Lump Sum:

A payment made on a single occasion, rather than several regular payments

LVR (Loan to Valuation Ratio):

Expressed as a percentage it is a measure of the loan compared to the value of the property. LVR is calculated by taking the loan amount dividing it by the value of the property, which will then be multiplied by 100 to give you the LVR e.g., $800,000 loan / $1000,000 (purchase price/registered value for property) x100=80% LVR. For an owner-occupied property you generally borrow up to 80% of the value or up to 60% for an established investment property.

Mortgage:

An agreement where you agree the bank can sell the property if you are unable to meet the servicing requirements of a loan. This mortgage is noted on the title of the property the agreement relates to. Confusingly, the term ‘mortgage’ is also used interchangeably with 'home loan' and refers to the money that someone borrows from a bank or specialist lender to purchase property.

Mortgage Discharge Fee:

A fee charged by banks and lenders to remove the bank’s security interest over a property.

Mortgage Protection Insurance:

An insurance policy which covers a home owners home loan repayments if the policy holder is unable to meet the repayments themselves.

Mortgagee:

The lender in a mortgage agreement, such as the bank.

Mortgagee Sale:

The sale by a lender, where a property is provided as security against a loan, when the borrower is unable to meet their repayment obligations.

Net Income:

Gross income minus taxes.

Negative Gearing:

Where the return on an investment is not enough to cover the costs of the investment. For example, the property maintenance and interest on the loan is more than the income you receive from rent.

New Build:

A property being built or already completed with a code of compliance that has been issued within the last 6 months.

Off-The-Plan:

Referred to when buying a property ‘off-the-plan’, it is where the purchase occurs before the build is completed after having only seen the plans.

Offer:

The intent expressed by one party to another to form a contract (which may have conditions and attached). In property purchasing terms, an offer is given by the potential purchaser completing a sale & purchase agreement with the proposed price and any conditions, and then signing the document. If the vendor accepts the price and terms of the offer, they will also sign the sale & purchase agreement.

Offset Loan:

A non-interest earning transaction/savings account which can be linked to a home loan account, so that the balance on the transaction/savings account can be used to reduce/offset the total balance on your home loan, which in turn reduces the amount of interest you need to pay on your home loan.

Per Annum:

Means 'per year' and is abbreviated as "p.a."

PIM (Project Information Memorandum):

A report giving information on items such as potential erosion, subsidence, hazardous contaminants, and stormwater. It may also include classifications under organisations including the Department of Conservation or Heritage New Zealand (formerly the Historic Places Trust), as well as authorisations required by the Resource Management Act.

PoA (Power of Attorney):

The person who has authority to execute documents on behalf of the person who granted the power. Also refers to a legal document which authorises another person to act on one’s behalf. A power of attorney can grant complete authority or may be limited to certain acts and/or periods of time.

POA (Price on Application):

Often used for exclusive, high-end properties, this is a pricing method used by some real estate companies whereby they disclose the guide price of a property to buyers they have determined are able to afford it.

Pre-approval:

An indication by a lender that they are comfortable to lend you funds up to a certain amount to purchase a property. Pre-approvals for existing properties already built can be obtained for up to 90days, whereas a new build property could be obtained for approximately 12months by most banks and lenders.

Premium:

An amount paid for a contracted service, such as amount due for an insurance policy taken out.

Principal:

The amount borrowed or still to be repaid. The part of the monthly payment that reduces the balance of the home loan.

Priority Amount:

The maximum amount your bank can claim before subsequent lenders can make their claim/s. This amount is used to protect the bank and you will see it noted on loan documents.

The set amount is higher than your home loan amount owed, generally 1.5 times the loan amount. The reason it is set so high is that partly, this is to ensure that there is sufficient headroom to cover accrued interest and recovery costs (ie property sale costs) if the bank needs to go down the mortgagee sale route (note that this is an absolute last resort for the bank. There should be plenty of communications between the bank and borrower before then). This high amount also allows for future increases in your home loan without needing to redocument loan specifics with a solicitor, thus saving you time and costs.

Private Sale:

The sale of property by the owner without the services of a real estate agent.

Private Treaty Sale:

A property sale process where the seller offers the property with no set price and potential purchasers submit their offers for the purchase before a deadline date and time.

Proxy:

A person who represents another, particularly in business dealings. It is also the name of the document authorising that representation.

Rate Lock Agreement:

An agreement where a borrower and lender agrees for a specific interest rate to be used at a fixed date in the future.

Refinance:

The process of paying off one loan with the proceeds from a new loan using the same property as security.

Reserve Price:

The reserve price at an auction is the minimum price which a seller will accept. Sometimes, the highest bid may fail to meet the reserve price, a situation called 'passing in'. Once a property is passed in, the vendor may enter private negotiations with the highest bidder to reach an agreeable price.

Resource Consents:

Resource consents are necessary when a group or individual wishes to carry out an activity or development that may have some effect on the environment. Resource consents relate directly to the rules set out in the District or Regional Plans and the Resource Management Act and are different to Building Consents.

Revolving Credit:

Like an account with an overdraft, a revolving credit loan type is one where money can be deposited and withdrawn up to your credit limit, as often as you need. The interest is calculated at the end of the day and charged monthly, which means the lower your daily balance is on the account, the less interest you will be charged.

Second Mortgage:

A second loan and also using your property as mortgage security for a second time, against a property that you have previously taken a home loan out on. On the sale of the property, the first home loan is repaid before that mortgage is removed, and before the second mortgage loan can be repaid.

Security:

A physical asset (such as a car or a home) used to ‘secure’ the bank’s money they have given to a borrower. This ensures the banks interests are protected if home loan repayments are not met.

When banks lend you money, they want to use a physical asset to secure their money. This means that if you default on your home loan and communication breaks down, they have an asset to sell to recoup the money that they have lent you. Note that this process, a mortgagee sale, is a last resort for the bank and they will try to work through any difficulties before getting to this stage.

Semi-detached:

Also known as a duplex, this is a property type where two buildings are attached by a common wall.

Settlement:

The time that sale of a property is finalised by the legal representatives of the vendor and the purchaser, mortgage documents come into effect, costs are paid and the new owner takes possession of the property and receives the keys.

SSR (Servicing Sensitivity Rate):

An interest rate that lenders use to 'stress-test' your home loan application. This rate allows the lender to check if you would be able to meet your repayments if the market interest rates increased.

Strata Title:

Also known as a unit title, this is a title to a unit or lot on a plan of subdivision associated with townhouses, units and blocks of flats and based on the horizontal and vertical subdivision of air space. Owners have a certificate of title, are absolute owners of a freehold flat and have an undivided share of the common property.

Subdivision:

A piece of land divided into individual lots for a housing development.

Sunset Clause:

A clause in a sale and purchase agreement that allows for you to legally cancel the agreement if conditions are not met by a specific timeframe, without incurring any penalty.

Superannuation Scheme:

Frequently offered by an employer, this is a fund designed for use as a retirement fund. Can also include KiwiSaver which has several different providers. Both of these may allow withdrawal of funds before retirement age to use as a deposit for a first home loan.

Survey:

A drawing or map showing the precise legal boundaries of a property, the location of improvements, easements, rights of way, encroachments, and other physical features.

Table Loan:

A type of loan repayment where the repayments are fixed over the term of loan except for when it adjusts for interest rate changes. The repayments pay the accrued interest and part of the balance of the loan itself. Initially the majority of the repayments goes towards interest. As the loan term progresses, repayments towards the principal portion increase.

Table Repayments:

A set repayment amount of principal and interest that remains the same until your interest rate changes.

Tax:

Money collected by the government from individuals and organisations based on income earned. The government uses that money to fund public services and infrastructure.

Tenancy in Common:

Tenancy in common is a way for two or more people to jointly own a property and have a defined share of the property. In the event of death, an individual’s portion will pass on to the beneficiary mentioned in their will, rather than automatically pass to the remaining owners of the property.

Tender:

A sale process, calling for purchasers to make their best offers in writing for that property by a given date.

Title:

A publicly available legal document evidencing a person’s ownership of a property. Claims against this property, such as a mortgage, will also be on the title.

Title Search:

A check of the title records to ensure that the seller is the legal owner of the property and that there are no unexpected claims on the property or outstanding debts. You should obtain this as part of your property purchase.

Townhouse:

A dwelling unit, generally having two or more floors and attached to other similar units via party walls. Can be Strata or Cross lease titled.

Trust Deed:

A legal document creating and governing a trust. This document outlines who the settlor, trustees and beneficiaries of the trust are. There are different types of deeds for different types of trusts.

Trustee:

A person who holds or controls property for the benefit of another.

Trustee Company:

A company used to act as a trustee, often in relation to administration and management tasks such as the transfer of assets to beneficiaries within a trust.

Uncommitted Income:

The amount of funds left over, after all expenses have been paid from your income.

Unconditional Agreement:

The legal contract that binds both the purchaser and the seller to settle on the agreed date at the agreed price. It is either not subject to any conditions or those conditions have already been satisfied. You should only consider entering an unconditional agreement if you are absolutely sure you want to buy a particular property and you already have the full purchase price or 'pre-approved' loan finance from a lender. You should also be confident that there are no other issues or requirements that must be satisfied before you are committed to purchase the property. An unconditional agreement commits you to purchasing the property.

Unconditional Offer:

An offer where no conditions are attached.

Under License:

Early possession of the property before settlement with the permission of the vendor. This usually involves the payment of rent.

Unencumbered:

A property with no mortgage lodged against it.

Unit Title:

The property type is usually an Apartment or Townhouse. The unit will be owned by an individual but the common areas will be shared by all in the building.

Unit Trust:

A specific type of trust where investor money is grouped together and managed by a Fund Manager.

Unsecured Loan:

A loan that is not backed up by assets or guarantee. In most cases this is a personal loan.

Utilities:

The private or public service facilities such as gas, electricity, telephone, water and sewer provided as part of the development of the land.

Valuation:

A written analysis of the estimated value of a property prepared by a qualified valuer. Common forms of property valuations are: Registered Valuations, E-Valuations (also known as Desktop Valuations) and Government or Current Market Valuation.

Vendor:

The person or entity legally authorised to sell a property, in most cases and in layman’s terms this is the current owner(s) of the property being sold.

Yield:

The interest earned or return by an investor on an investment, stated as a percentage of the amount invested.

Zero Rated:

When the vendor and purchaser are both registered for GST on a Sale & Purchase Agreement and GST will not be paid for or claimed on the sale.

Zoning:

Councils designate zones on land to manage how different areas are used, developed or protected. Zones include residential zones, business zones, rural zones and open space zones.