Home Loan 101: 15 Common Terms You Need To Know

Are you buying your first home soon? Perhaps, you’re renting a flat with your friends? If you're ever dreaming of getting your own home, it's important that early on, you learn the most commonly used terms for home loan in New Zealand. It's one good start to start your own research and plan your home buying process as early as now.

Here are 15 commonly used home loan terms you need to know.

1. Assets

Real estate agents and financial advisers always use this when referring to your house. Assets are something you buy as an investment to sell it off when the price increases later on. It’s something that gives you money without putting much effort into it. 

The same is true about a house purchase. Many people are buying a home not to live in it, but to sell it off later on. While this is more common for flats and apartments, some Kiwis also do this for houses. 

2. Amortisation

Amortisation is one term you need to know before settling your home loan payments. It works as the percentage from your monthly payment that goes into your principal payment increases over time. To understand it better, here’s an example:

A loan amount of $500,000 with a term of 10 years at 5% interest rate will have $5,303 total payment for the first month. $3,220 will go to the principal, while $2,083 goes to the interest. In the second month, $3,233 will go to the principal, while $2,070 goes to the interest.

As time goes on, more of the monthly payment will go to the principal until the balance of the loan amount is completely settled.

3. Annual percentage rate

Annual percentage rate (APR) is often mistaken as interest rate, but they’re two completely different things. APR is the true cost of your credit, including the interest and other fees in your loan. For example, a 4.5% advertised interest rate isn’t final. Because of additional fees, it may round up to 4.6 to 4.7% annual percentage rate.

A low-interest rate sounds inviting, but remember to always check its fees and other associated costs with the loan. Lenders often include this information in their advertisements as a fine print. Read them carefully before signing into one.

4. Equity

Equity is the difference between your home loan and market value of your home. As you pay for the mortgage, the equity of your home builds up. Depending on your region, your equity may vary greatly. Here’s an example.

If you purchase a house for $500,000 and you got a 20% down payment to pay for the balance $460,000, your home’s value is 20% home equity interest. The remaining $40,000 is the expenses you covered on your own. While you technically own your home, this means you only own $40,000 of the home.

5. Closing costs

This is the amount to pay for closing your home loan deal. Also known as settlement costs, it includes title insurance, escrow costs, lender charges, real estate commissions, transfer taxes, and more. These charges include origination fees, processing fees, and other costs such as underwriting and funding the loan.

6. Principal 

Principal is the original amount you borrow from the bank, not including interest. Depending on context, it can be very different. For a home loan, the principal is the original amount of the loan, not including the interest that it has acquired through your repayments. No matter how much your interest is affected by inflation, your principal won’t change.

When you make repayments, most of the amount paid goes into the interest. As time goes on, more and more of your amount paid will go to the principal. Once the principal is fully paid, your monthly repayments will end too.

7. Underwriting

If you take out a house insurance policy, you’ll often hear underwriting. In every big purchase like a house, there’s always a financial risk. It takes risks such as late payments for a fee. For loans, this includes checking the applicant’s credit history, financial records, and assets for collateral. All types of loan involve underwriting, but it’s most common for home loans.

The underwriter assesses these risks and let each risk taker sign their name on the evaluation. This means they agree to pay a premium for borrowing the money used for the house purchase.

8. Pre-approval

Pre-approval means you have a home loan approved before buying a house. Sorting out your finances helps you set a budget and organise your purchases accordingly. Ultimately, it’s up to the lender to approve your home loan pre-approval. This is the bank’s acknowledgment that you can pay for the agreed amount, given that you meet the terms and conditions.

9. Fixed interest rate

Fixed interest rate means the rate of your home loan won’t change for a certain period. This is ideal for first-time homebuyers as your rate stays the same even when other variables change over time. It’s the perfect time to take advantage of this during the period where the fixed interest rate is low.

There’s also a combination of fixed and adjustable rates called hybrid rate mortgage. After the fixed-rate period is done, you’re usually given an adjustable-rate period. The adjustable-rate is tweaked annually, and won’t change until the next year.

10. Appraisal

Appraisal refers to the estimated value of the professional opinion of the market value of the house. This is often an option for real estate investors who plan to sell the home later on. Otherwise, homebuyers can also consult appraisal for mortgage value and refinancing options applicable for your purchase.

Banks also consult an appraisal to make sure they only lend the right amount. This is true as the house serves as the collateral for the mortgage. The bank or the lender pays for the appraisal fee, which can cost up to several dollars depending on the expertise of the assessor. 

11. First home withdrawal

If you buy your first house through your KiwiSaver, you need to know first home withdrawal.  It works as you take out the money in your KiwiSaver savings to finance your home purchase. Depending on your provider, the amount you can withdraw can vary greatly. Generally, you can withdraw as much money you want, given you keep at least $1,000 in your account.

Aside from your savings, you can also take advantage of the First Home Grant. This is additional support from Kāinga Ora. You can also submit your application to them directly.

12. Floating interest rate

Floating interest rates are the opposite of fixed interest rates. This goes up and down constantly. It gives you the flexibility to make lump sum payments at any time without suffering from penalties. As you’re not tied to a fixed rate, you can pay off your mortgage faster when the rate drops. Although, this can be a double-edged sword that can also increase your payments when the rate rises.

Mortgages are often available both in fixed and floating interest rates. Although, some home loans are only available with floating rates. Before taking out a loan, it’s recommended to consult your bank about your options first.

13. Liability

As opposed to an asset, liability is when your house drains your pocket. It usually happens when you live in it full-time. This means you pay for maintenance, repair, and other costs for your house. Liability shouldn’t be confused with expenses because they’re directly related to income and revenue.

14. Mortgage

Is it a mortgage or a home loan? They’re essentially the same thing! Mortgage is the loan you take out to purchase a home or a property. It’s the money that you borrow from the bank, and you’re bound to repay them for a certain period. When you take out a mortgage, the house serves as your collateral. If you fail to settle your repayment obligations, your house can be repossessed by the bank.

Usually, the term runs for 25 years but it can be shorter or longer. To avoid getting your property repossessed, borrow what you can only pay. It’s important to remember that you still have to pay for taxes, utility bills, insurance, and more.

15. Premium

Premium is the amount you pay an insurance company for your policy. This is your monthly payment to continue your coverage for anything that may happen, including liabilities and damage types. These are usually paid every month. Failure to settle your payment may result in cancellation of your policy and loss of protection too.

You’ll often hear this term when you purchase an insurance policy to secure your house. This includes taking out home, contents, and car insurance up to some extent. Your premium depends on different factors that will be assessed once applying for coverage.

Don't know where to start? Save up for your first home with KiwiSaver! Find the best KiwiSaver fund for you, right here at CompareBear!