Mortgage Terminology

Navigating the world of mortgages can be daunting, especially with the plethora of terms and jargon that can confuse even the most seasoned borrower. To help demystify the process, our mortgage broker has put together a comprehensive guide to loan terminology commonly used in New Zealand. Understanding these terms will empower you to make informed financial decisions.

Principal

The principal is the amount of money you borrow from a lender. For example, if you take out a $300,000 mortgage, that amount is your principal. As you make mortgage repayments, your principal decreases (unless you have chosen an Interest Only repayment structure).

Interest Rates

The interest rate is the percentage charged by the lender on the borrowed amount (the principal). It can be Fixed, where the rate remains the exact same over a set period, or it can be a Variable rate, meaning the rate can fluctuate up or down based on market/economic conditions.

Fixed Interest Rate

A fixed interest rate remains the same for a pre-determined period, typically ranging from one to five years in New Zealand. This provides certainty in your mortgage repayment amounts for a fixed period of time, but may result in you paying more if interest rates decrease during that time.

Variable Interest Rate

A variable interest rate can change over the course of your loan, reflecting movements in the economy/market. This means your mortgage repayments can go up or down, offering potential savings when the rates drop, but increasing your repayments if they rise.

Loan Term

The loan term is the duration over which you agree to repay your loan. For mortgages in New Zealand, terms typically range from 20 to 30 years.

Loan Fees

Banks may charge additional fees beyond interest rates - such as application fees, re-documentation fees, and discharge fees.

Amortisation

Amortisation is the process of spreading your loan repayments over time. Each payment includes both principal and interest, with the interest portion decreasing and the principal portion increasing as the loan matures.

Equity

Equity is the difference between your property’s market value and the outstanding balance on your mortgage. For example: if your home’s market value is $900,000 and your mortgage is $720,000, you have $180,000 of equity in your home. Building equity is a key goal and benefit of homeownership, as it represents your ownership stake in the property.

Deposit

A deposit is the initial amount you pay towards the purchase of a property, usually expressed as a percentage of the purchase price. In New Zealand, first-home buyers often need a 20% deposit for their mortgage, but lower deposit options are available under certain schemes.

LVR - Loan to Value Ratio

LVR is the ratio of your loan amount to the value of the property, expressed as a percentage. For instance, if you have a $400,000 loan on a $500,000 property, your LVR is 80%. Higher LVRs can be riskier and may attract higher interest rates or require mortgage insurance.

Refinancing

Refinancing involves replacing your existing loan with a new one, usually to take advantage of better interest rates, to alter the loan term, or to consolidate debts. Refinancing a mortgage can be a valuable strategy to reduce costs or access equity.

Repayment Holiday

A repayment holiday is a break from making mortgage repayments, offered by some lenders under specific conditions. While it can provide temporary financial relief, interest generally continues to accrue during the holiday period.

Pre-Approval

Pre-approval is an indication from a lender that they are willing to lend you a certain amount, based on an initial assessment of your financial situation. It can strengthen your position when negotiating a property purchase, but it’s not a 100% guarantee of final loan approval.

Offset Account

An offset account is a transaction account linked to your mortgage. The balance in this account offsets the loan principal, reducing the amount of interest charged. For example, if you have a $300,000 mortgage and $50,000 in an offset account, you would only pay interest on $250,000.

Break Fee

A break fee is a charge incurred for breaking a fixed-rate loan term early. This fee compensates the lender/bank for their potential loss due to changes in interest rates. Break fees can be substantial, so it's crucial to consider the cost before refinancing or repaying a fixed loan early.

Serviceability

Serviceability refers to your ability to meet mortgage repayments based on your income, expenses, and other financial commitments. Lenders assess serviceability to ensure you can afford the loan without undue financial stress. A good mortgage broker will help you ascertain what level of mortgage you can comfortably service.

Redraw Facility

A redraw facility allows you to access extra repayments you've made on your loan. This can provide flexibility to use additional funds when needed, but it's important to understand any fees or conditions associated with this feature.

DTI - Debt to Income Ratio

DTI is a measure used by lenders to assess your financial capacity. It compares your total debt to your gross income, helping to determine if you can afford additional borrowing. A lower DTI indicates a healthier financial position.

Guarantor

A guarantor is someone who agrees to be responsible for repaying your loan if you default. Having a guarantor can help you secure a loan or better terms, especially if you have a low deposit or less-than-ideal credit history.

Loan Application Fee

This is a fee charged by lenders to cover the cost of processing your loan application. It's important to factor in this and other fees when comparing loan options to understand the true cost of borrowing.

Need personalised advice on your loan options? WealthHealth mortgage brokers are here to help!
It’s our mission to get you the very best deal on your mortgage - whether you’re a first home buyer, would like to refinance your mortgage or looking at a mortgage to buy an investment property.

This information is not intended to be personal advice, and is for information purposes only.
Before acting on this information, please contact our mortgage brokers to ensure this is suitable for your circumstances.