Like most people who live and breathe their professions we are prone to occasionally get carried away using acronyms and industry jargon to explain the details of the work we're doing. It's something that I get really annoyed at so we're doing something about it!
Below is a summary of a few of the common terms you'll hear thrown around and what they mean. If you've heard any other terms that you want to know about or would like added to this then send us a message, we'd love to cover everything!
LVR - This stands for "Loan to Value Ratio". Essentially it's the percentage of the value of your property that the bank is lending. If your property is worth $100,000 and you are borrowing $80,000 then your LVR is 80%.
Mortgage - Despite the common use of the term "Mortgage" talking about the loan itself... A Mortgage is actually the legal charge that a bank takes over your property. It's this registration of a Mortgage that allows them to force the sale of your property should you default on your lending.
Home Loan - This is your loan which is secured by a Mortgage. If you bought a property a the bank lent you $100K. That $100K would be your Home Loan. They've taken a Mortgage on your property as security if you default.
Security Value - This is the value of the property which the bank has a Mortgage over. Or the total value of multiple properties the bank has mortgages over. If your property is worth $500K then that is the security value. This is key when establishing your "LVR" as you divide your Home Loan amount by your Security Value to establish your LVR. $300K lending against a property with a Security value of $500K gives you a 60% LVR. How do you know your security value? That depends on the valuation below...
RV/GV/CV - This is the council Rating Valuation on your property. It can be referred to as a "Government Valuation" "Council Valuation" "Capital Value" or "Rating Valuation". This number is a fairly vague assessment of what your property is worth. It's worth focusing on the method to understand this. It is updated only every three years, it's based on an average of houses in your area and does not involve any inspection of the specific condition or improvements on your property.
Security - This is what you are offering to the bank, for them to provide the lending. In all cases with Mortgage based lending this is a property. This term is also used for personal loans where they may take a vehicle as security.
Principal - Simply put, this is to do with the amount you owe. So if you have a $100K loan you have an outstanding principal balance of $100K. When you repay this $100K loan over a loan term of say 10 years... you pay interest on the $100K and at 5% that would be $96/wk, but the total you would pay each week would be $244 because you're paying $148 of principal off your loan. So next week you would only owe $99,852.
P&I - This refers to paying both the interest charged on the loan and also paying Principal off the loan. Principal and Interest. As detailed in the calculation above.
RBNZ - This is the Reserve Bank of New Zealand. They set the rules around deposit requirements and LVR limits for investors. Often you hear the new investor rules being referred to as the RBNZ LVR Limits... that's an overload of acronyms!
Refinance - Technically a refinance is when you take your lending from one bank to another. A loan is said to be "refinanced" when it moves away from one lender. This term is also often used to describe a FRR which we have explained below.
Homestart - A Grant provided by the Government where you are eligible for $3K, $4K or $5K if you have been contributing to Kiwisaver for 3, 4 or 5 years or more. This Grant has income, price and citizenship/residency requirements, and is doubled if you are building your first home.
Loan offer - This is is a formal letter from a lender confirming the amount they have approved you for and the terms and conditions of that lending. Often banks have online calculators or you'll talk to someone who may tell you that you'll be approved for an amount. Without a loan offer, it is not an approval because the terms are not defined and a formal commitment has not been made. We always aim to get you a formal Loan Offer.
Loan term - This is the amount of time you will take to repay the loan. If you have a 30 year loan term, for example, your repayments are based on you paying the interest on the loan plus the amount required to repay the outstanding balance over 30 years. If you reduce the loan term, your repayments increase because the amount you're reducing the loan by each week is greater. This is not to be confused with a fixed term
Fixed Term (fixed rate) - This is when your loan has an interest rate which is set (or fixed) at a certain rate for a certain period of time. You may borrow $250K over a 30 year loan term, but your fixed rate term is 2 years... or a 2 year fixed rate. Once that rate expires you still have your home loan but you will need a Fixed Rate Review.
FRR - This is a "Fixed Rate Rollover". If you've taken out a loan and fixed it for two years at a certain rate, you will need to review this and roll over on to a new fixed rate. We carry out reviews at this stage for people to ensure they're still getting the best deal and have the best structure.
Unconditional - Simply put, this means that all conditions have been met. This refers to two key things in our line of work.
- Your loan offer.... while your initial loan offer might have conditions such as evidencing your savings or Kiwisaver, we then provide information to the bank to meet those conditions and that offer is unconditional.
- Your purchase... Once you've got an unconditional finance offer and you've satisfied the other conditions on your offer to purchase a property (builders report, LIM etc) then you can go unconditional on your purchase
Settlement Date - This is the day that you take over the property you are purchasing. Your lawyer "settles" the purchase by providing your funds and those from the bank, to the vendor. You then take possession of the property.
ERA/Break Cost - An "Early Repayment Adjustment" is the fee you are required to pay for repaying your fixed loan earlier than the agreed term. This can also be called a break cost. This is generally calculated as the difference between the rate you are on and the rate the bank could currently lend that money for, multiplied by the time you have remaining on your fixed rate contract. This is why these costs are minimal if rates have increased, because banks could make more money lending that money to someone else.
LIM Report - LIM stands for Land Information Memorandum. Essentially this is a document which details the council history with your property. It includes building consents and other details which effect your property directly. We always recommend you get a LIM report and have it looked over by your solicitor.
I'm sure there are plenty of other words which come out from time to time. If you'd like us to clarify any of those for you or to add them in here. Just click the Contact Us link at the top of the page and we'll add them in.
As always, we're here to help with Advice and arranging lending options so feel free to get in touch any time.
Adam, Claire and the My Mortgage Team