The terms you’ll see and hear when you apply for a home loan

Applying for a home loan can bring with it a whole new language. Here, we explain some of the most commonly used terms.

4 minute read

From LVRs to drawdowns, understanding some of the terms used when applying for a home loan could make the process that much easier.

Statement of position 

This gives your lender an overview of your full financial position when you apply for a loan. It’s a good idea to think of it like an application form. The statement of position covers your income, expenses, assets, and any existing debt you might have, as well as personal information like your relationship status, and whether you have children or other dependents. 

It’s important the information you provide is accurate as your lender will use it to understand whether you can afford the amount you’re trying to borrow.

Conditional approval

A conditional approval means your lending application has been approved subject to certain criteria being met. Usually, a conditional approval is given at the beginning of the home buying process. It lets you know how much you can afford to spend and is usually valid for 90 days, giving you time to search for, and find, a house. It may be valid for longer if you’re looking to build. If you have a conditional approval, its important any offer you make on a property is subject to finance.

Unconditional approval

Once you’ve found a house and made your subject-to-finance offer, you’ll need to start working with your bank or lender to meet all the conditions outlined in your conditional approval. As soon as these conditions, and any other clauses in your offer have been met, your approval will become unconditional, and your bank will confirm this directly with you.

Auctions are slightly different in that your pre-approval must be unconditional before you place a bid at auction. Find out more about buying at auction.
 

Loan documents

Loan documents contain all the terms and conditions of your loan. They specify things like the loan amount, term (length) of your loan, interest rate, and repayment amounts. If you’re buying a house, the loan documents are usually sent to your lawyer, who will take you through everything before you sign them. The signed documents need to be returned to your lender as early as possible before settlement day so the lender can arrange for your loan to be drawn down on time.

Drawdown and settlement

A drawdown is when the money you’re borrowing is paid to you for a home loan top-up, or to your lawyer if you’re buying a property. If it’s for a property purchase, your lawyer will then pay this money to the seller’s lawyer. This happens on ‘settlement’ day – the big day when you actually start to own your home - and is the first day your loan is active. Once your lawyer has paid the seller’s lawyer, they’ll complete the registration of the property title in your name.

Equity

The portion of the value of your property that you own outright – where there’s not money owing to your lender. For example, if you buy a house for $1 million, and you pay a $200,000 deposit, you have 20% equity in the property.

Any borrowed money you pay off, plus any increase in your property’s market value, will increase your equity.

Low equity

A deposit that’s less than 20% of the purchase price of the property. If you have low equity, you may be charged a fee, or a higher interest rate, called a low equity premium. The low equity premium may apply until your equity is no longer classed as low. If you top up your home loan, you may not be able to borrow more than 80% of the current value of the property.

Debt to income (DTI) ratio

This is how much of your monthly income will be used to repay your debt. Lenders use this figure as a way to measure a borrower’s lending risk. A low DTI is favourable, whereas a high DTI can indicate someone has too much debt for the income they earn.

Loan to value ratio (LVR)

The Loan to value ratio (LVR) is the amount of your loan compared to the value of your property, written as a percentage. When a lender talks about an LVR, they’re usually referring to how much you can borrow. Generally speaking, you need to have a deposit of 20% of the purchase price. The LVR in this instance is 80%.

Principal

This is the outstanding balance of your original loan amount, not including any interest. For example, if you want to buy a house worth $800,000 with a 20% deposit, you’ll borrow a principal amount of $640,000 (80% of the property’s purchase price). You’ll then need to repay this amount to your lender, plus any interest and fees.

Scheduled repayment

This is your weekly, fortnightly, or monthly loan repayment that happens automatically once your loan is drawn down. This payment is usually split between paying your principal loan balance and the interest accrued on your loan since your last payment. The higher you set your repayment amount, the more principal you pay off, which helps to repay your loan faster.

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All home loans are subject to our lending criteria (including minimum equity requirements), terms and fees 

This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article. Any opinions in this email are not necessarily shared by BNZ or anyone else.