Apr 13, 2022 5:11:07 PM

Understanding Home Loans

Topics: Financial Health, First Home Buyer, Home Loans 0

Many first home buyers are left feeling mystified and confused by the amount of home loan jargon they’re expected to understand when buying a first home. The sheer amount of information can feel overwhelming, and many are left wondering what it all means. To help simplify things for first home buyers, we’ve unpacked some of the more common – and often most confusing – home loan terms and provided a basic explanation of each.

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Conditional approval

A home loan pre-approval or conditional approval is the lender’s way of confirming in writing that they will lend to you – and how much – provided certain conditions are met.

When you’re house hunting for a first home, pre-approval lets you move quickly and make an offer when you find a home that fits your price range.

Deposit

Saving a deposit is often the biggest hurdle for first home buyers. Most lenders require the borrower have at least 20 per cent deposit of the value of the property when applying for a home loan (although some lenders will look at lending higher than 80 per cent). Your deposit can be made up of your own savings, KiwiSaver Withdrawal (subject to meeting certain requirements), as well as cash gifts from family or any Government first home grants you may be eligible for.

Equity

Home equity is the portion of your property’s value that you own. It’s calculated as the difference between what your home is valued at on the current market, and how much money you still owe on it.

Loan to Value (LVR)

LVR is the amount you want to borrow expressed as a percentage of the property’s market value. The Reserve Bank of New Zealand has set a limit on the amount of high LVR lending – over 80 per cent - that banks can do.

Fixed rate vs. floating rate mortgage vs. split loan

A fixed rate mortgage means your interest rate and mortgage repayments stay the same for a fixed term, even if interest rates go up or down. Floating rate mortgages shift up and down as interest rates fluctuate. A split home loan is a combination of both fixed and floating interest rates that help you get the best of both – flexibility with floating and certainty with fixed.

Low equity fees vs. low equity margin

Both low equity fees and low equity margins are charged by lenders to borrowers who don’t have a 20 per cent deposit. A low equity fee is a one-off charge that can be added to your mortgage so you don’t have to pay it up front, while a low equity margin is a higher interest rate charged on your mortgage that may be removed once you reach over 80 per cent equity.

Lender’s Mortgage Insurance (LMI)

LMI, or Lenders’ Mortgage Insurance, is a one-off insurance premium that you’ll be required to pay to your lender if you’re applying for a loan above 80% of the security value of the property you’re purchasing. It’s an insurance policy that protects your bank or lending institution against any financial loss in the event you’re unable to repay your home loan.

Revolving credit or off-set mortgage

With revolving credit, your home loan becomes your everyday account, and your loan balance adjusts as money comes in and goes out. To save on interest charges which are calculated daily, keep your revolving credit balance as low as possible. An off-set mortgage works similarly, but uses the money in your everyday and savings account to off-set against your home loan account and reduce the interest you’re charged. 

First home buyer FAQ’s

Buying your first home is one of the biggest investments you’ll ever make so it’s understandable you may be feeling a little overwhelmed. Before stepping onto the property ladder, it’s essential you do your homework and properly prepare for the journey ahead. Check out these FAQs for all you need to know about buying a first home. If you need advice, get in touch with Mortgage Express to find a Mortgage Express branded adviser in your area.