Mortgage Terms – Common Terminology Explained
When buying a house and getting a mortgage, you’ll inevitably come across property and mortgage terms that aren’t commonly understood. We’ve made a glossary of the common industry specific words to help ensure any property buyer’s understanding.
A sale process in which an auctioneer sells the property at a specific time on a specific day. The vendor sets a reserve price; once that price has been reached the property will sell to the highest bidder. If the reserve price isn’t reached there is an opportunity for the highest bidder to negotiate, with the vendor’s real estate agent acting as intermediary. Auction sales are unconditional so it’s important to have full loan approval and complete due diligence before bidding.
A group of owners in a block of apartments/flats that manage the maintenance and repair of the building and its shared spaces. Body Corporate members are elected by all owners in the building and have responsibilities under the Unit Titles Act. Before making an offer, buyers should review the Body Corporate minutes and other documentation to ensure the building is being well managed. A lawyer should also review and provide advice prior to the buyer making an offer.
Certificate of Title
Often referred to just as the title, this is a legal document that proves ownership of a property. It describes the property, who owns it and if there is a mortgage registered against the title.
Any items included in the sale of the property. Common chattels are fixtures such as curtains, light fittings, ovens, and dishwashers. Items such as furniture, playhouses, and laundry equipment are often negotiable chattels. The Sale and Purchase Agreement details which chattels are included in the sale and may specify some that are excluded.
Code Compliance Certificate
Issued under the Building Act 2004, this document certifies that building work was carried out under a building consent and that it complies with both the building consent and the New Zealand Building Code.
An offer to purchase a property if certain conditions are met by the date specified in the Sale and Purchase Agreement. Common conditions are confirmation of finance or obtaining an acceptable building inspector’s report.
Conveyancing is the legal process of transferring the ownership of the real estate from one entity to another. This is done by a property lawyer or a conveyancer.
A Cross Lease Title is given to pieces of land that have more than one owner. This is a more complex form of ownership so it’s important to get a lawyer involved early to look over the details.
Floating Interest Rates
As opposed to fixed interest rates, floating interest rates are subject to change as economic factors change. Floating rates are higher than fixed rates.
Full Loan Approval / Unconditional Approval
A document in which a lender has committed to the maximum amount they will lend the borrow to purchase a specific property. This is required before any unconditional offer can be made, including an offer at auction.
Land Information Memorandum (LIM) report
A report provided by the local council. It includes summary information on roads, flooding assessments etc, as well as rates information and resource planning consents.
Loan to Value Ratio (LVR)
The amount borrowed calculated as a percentage of the property’s value. For instance, if a borrower had a $200,000 deposit and wanted to borrow $800,000 to buy a property worth $1,000,000, the LVR would be 80%.
(800,000 divided by 1,000,000 = 0.8)
Low Equity Margin (LEM)
A higher interest rate sometimes applied due to a borrower’s LVR being higher than the 80% threshold.
Low Equity Premium (LEP)
Additional fee sometimes charged due to a borrower’s LVR being higher than the 80% threshold. The higher the LVR, the higher the fee could be. This is an alternative to the Low Equity Margin system. Hopefully you don’t need to hear about this mortgage term, but it’s a topic your Mortgage Broker will go over with you, if needed.
Commonly used to describe a home loan. Technically, it’s a legal document that is the security the borrower gives the lender and is registered against the Certificate of Title. The property can only change ownership when the home loan is repaid, and the mortgage is removed from the title. This is called discharging the mortgage.
A lender who is loaning the money to the borrower in return for a security on the property.
Refers to the way a mortgage is set up. Often a mortgage is split into several accounts, with different refix dates and interest rates. The structure may include revolving credit accounts. This is one mortgage term you need to understand, as your Mortgage Broker will help you with the best structure to suite your needs!
Offer and negotiation
A process in which a buyer makes an offer in writing by filling out a Sale and Purchase Agreement, specifying the purchase amount and any conditions. The vendor then accepts it, rejects it, or makes a counteroffer. The vendor’s real estate agent acts as a go between in the negotiations.
Preapproval/Preapproved Home Loan
A document issued by a lender that indicates how much they would lend the borrower. The money is subject to conditions, including approval of the property before finance is confirmed. Only valid for a specified period, it gives prospective buyers clarity on what they can afford so they can be realistic when house hunting.
The principal is the amount borrowed against the property. Principal payments are the payments made to reduce the amount owed, unlike interest payments which do not reduce the mortgage amount.
A sale done directly between the seller and purchaser, without a real estate agent as an intermediary.
Revolving Credit Account
An account that allows the borrower to deposit money to pay down their mortgage, and then withdraw the money if needed.
Sale and Purchase Agreement
The contract that lays out the detail of the sale, including sale amount and any conditions. To be valid it must be signed by both seller and buyer. Usually facilitated by a real estate agent and should be reviewed by the buyer’s lawyer before the buyer signs.
I’m sure you are all familiar with this mortgage term! The day that ownership is transferred from vendor to purchaser. The purchaser’s lawyer transfers the purchase price to the vendor’s lawyer. In turn, the vendor’s lawyer transfers the legal title of the property to the purchaser. At this point the purchaser gets the keys and has legal access to the property.
Sale by Tender
The process in which offers are submitted in writing (called ‘tenders’) to the real estate agent by a certain date. At that date, the vendors can open the tenders and decide if there is one that they will accept. Alternatively, they can then go into negotiation with any of the tenderers.
An offer with no conditions attached. If the vendor accepts an unconditional offer, the deposit immediately comes due and the buyer is contractually obliged to pay the full purchase price at the specified settlement date. All due diligence should be done before making an unconditional offer, including arranging full loan approval for the property with your mortgage broker. This is the mortgage term your Mortgage Broker will mention towards the end of your home loan approval process.
The person, people or entity that own the property being sold.