Glossary of financial services terms

1st Tier or main bank lender: Mainstream banks with prime interest rates. Common mainstream banks are the ANZ, ASB, BNZ, Co-Operative Bank, Kiwibank, SBS, TSB, Westpac.

2nd Tier lender: Typically, a non-bank lender with more flexible lending criteria that borrowers go to if they are unable to obtain a loan from a first-tier lender. 2nd Tier lenders like Avanti, Bluestone & Pepper, usually have higher interest rates.

AML: The process of identifying a borrower in accordance with the Anti Money Laundering and Countering the Financing of Terrorism Act.

Ability to pay: Refers to a borrower's ability to make repayments on the debt they owe.

Annual rate of return: The percentage of interest you are getting on money invested.

Approval: When a loan application has been approved by a lender. Lenders may also “Pre-approve” a loan to be advanced later if a borrower wishes to attend an auction or they have not yet found a property to purchase etc.

Approval Conditions: The conditions a lender imposes upon a borrower in the Letter of Offer (LOO) which must be satisfied before a lender will advance the funds. There are lenders “Standard” conditions for all loans and “Special” conditions which are conditions specific to an individual borrower may also be imposed.

Appreciation: The increase in the value of an asset over a period, as opposed to depreciation. For instance, you might say, my house has appreciated 4% in the past year meaning it rose in value by 4%.

Asset: Any possession that has some financial worth. e.g., your home, car, house contents etc.

Audit: An examination of a company's or individual's accounting records and books conducted by an outside professional. This is done to ensure the company or individual is maintaining proper and correct records. Individuals may be audited by the Inland Revenue Department at any time.

Financial Advice Providers (FAP): Also audited by the Financial Markets Authority (FMA) to ensure the FAP is meeting its license to operate conditions.

Back taxes: Due taxes that have not been paid on time and are still owing.

Bad debt: A debt that is deemed uncollectible and so is written off by the lender.

Balanced budget: A budget in which the income equals expenditure. In the same way as a negative budget means income is less than expenditure and a positive budget means income is greater than expenditure.

Bankruptcy: When an individual or company is unable to pay the debts they owe because their liabilities outweigh their assets, they are deemed to be insolvent. Bankruptcy is one process by which their financial affairs may be wound up.

Bonds: A bond is a fixed interest financial asset issued by governments, companies, banks, etc. Bonds pay the bearer a fixed return at a specified end date. Bonds differ from shares in that the promised return is fixed, that is, it is predetermined.

Borrow: To obtain or receive money on loan with the promise or understanding that it will be repaid.

Bridging finance: Interim financing that is taken out while waiting for more permanent financing to be arranged.

Break fees: A fee charged by the lender and paid by the borrower when the borrower breaks the agreed fixed interest terms causing the lender a loss. This loss is passed to the borrower as a break fee.

Broker: An individual who specialises in selling financial products such as insurance, loans, or investments etc. A broker can save you a lot of time by sourcing great deals for your financial needs.

Brokers Commission: Lenders pay the mortgage broker an up-front commission after a loan is advanced. This typically enables the broker to provide their services at no cost to the borrower.

Budget: A detailed record of predicted financial activity relating to income and expenses.

Budget deficit: When spending is greater than income your budget is in deficit, i.e., it is a negative budget. (See Balanced Budget).

Building society: A non-profit making company established to help with finance for those wanting to purchase a home.

Buyer's market: Most commonly referring to property. A market in which supply exceeds demand i.e., there are more houses for sale than there are people wanting to buy a house. As a result, the buyer has more opportunity to dictate the price and the terms of sale. (Also see Seller's Market).

Capital: Accumulated wealth in the form of money or property.

Cash dividend: An amount paid in cash to a company's shareholders. The amount is normally based on the profit made by the company in the past financial year.

Cash Incentive: A cash amount paid by a lender to incentivise a borrower to take out a mortgage with the lender and agree to keep the mortgage with the lender for an agreed period, typically 3 years.

Change of Entity: When the borrower changes without any change being made to the loan and or loan security.

Chattel: An article of movable personal property. Within the context of a house, a chattel is something that is not physically a part of the home but is sold with the home, e.g., curtains, light fittings etc.

Claw back (Brokers): The agreed amount of the broker's commission to be repaid to the bank if the loan does not remain with the lender for the agreed period after the commission was paid to the broker. This clawback is usually recovered from the borrower.

Claw back (Lenders): The cash incentive amount the borrower is required to pay back to the lender if the mortgage does not remain with the lender for the agreed period.

Clear title: To do with buying a home. Clear Title means your ownership of the property is untainted by any claims, disputes, or money owing on the property. The property title is searched for clear title by your solicitor.

Compound interest: Interest earned on previously earned interest as well as on the principal.

Construction Loan: When the security property is a new dwelling under construction and the lender advances portions of the loan during the construction. E.g., After the slab is poured, when the roof is on etc.

Consumer Price Index: The CPI, as it is called, measures the prices of consumer goods and services within a country. It is used as the basis for calculating measure of a nation's rate of inflation.

Consumer Guarantees Act: An act that details the rights of the New Zealand consumer. The Act is often misused and misquoted by retailers, particularly in their effort to persuade you to take out an Extended Warranty.

Contract: An agreement between two parties. Such an agreement is legally binding. Always carefully read the terms and conditions of any contract you enter.

Cooling-off period: After entering some kinds of contracts there is a cooling-off period whereby you can cancel the contract without giving any reason. e.g., Door-to-door sales.

Credit: A positive financial balance e.g., your credit card may be in credit if you have more money on it than you have spent. Alternatively, you are in credit with the bank when you have money in your bank account. The opposite is to be in debit or overdrawn on your bank account.

Credit card: The most dangerous financial tool available to you. So handy and yet so open to misuse. Be careful and remember, credit card debt is a loan; it must be paid back and, while it goes unpaid, it incurs a high interest rate.

Credit rating: Individuals and companies can have a credit rating. It is an evaluation of their ability to repay debt. You may not think you have a credit rating but, if ever you have borrowed money, you do. Banks and Finance companies will usually check your credit rating before loaning you money.

Credit risk: The risk a lender takes that a borrower may default on their obligations to repay a loan.

Credit union: An alternative to a traditional bank. A not-for-profit institution that is operated as a co-operative and offers financial services such as banking and loans, to its members.

Creditor: Someone who is owed money by another person or company. i.e., your creditors are those you owe money to such as your bank, or a company who you have a hire purchase agreement with.

Current liabilities: Any money owed. An individual would list their liabilities as their mortgage, personal loans, credit cards, after pay and outstanding bills etc.

Debt: Any money borrowed that needs to be repaid.

Debt to equity ratio: Your assets divided by your liabilities. This is important when borrowing money against your home. A lender will want a low debt equity ratio. That is, the amount borrowed must not be too great a proportion of the total value of the property.

Debtor: A person who owes money.

Default: To default on a loan means to fail to repay it. There are serious repercussions for loan default.

Deficit: When an individual's or company's liabilities are greater than their assets; or, in other words, their expenditure is greater than their income, they are said to be in deficit.

Dependant: One who relies on another for financial support. Usually, this refers to children under age 18, i.e., your children are dependants of yours.

Depreciate: To lessen the value of. A typical depreciating item most of us own is a car. Usually, over a period, a car will depreciate. That is, it will lose its value. The opposite is when something appreciates, that is, it grows in value. Over a period, property usually appreciates. A general rule of thumb is not to borrow money to purchase items that depreciate.

Draw down: The process of drawing down or the advancing of funds a lender has agreed to lend. Funds can be partially drawn down. This means that you still have funds available to draw down to the agreed limit.

Depreciation: The amount or rate at which an item depreciates or loses value.

Disability insurance: See Income Protection Insurance.

Disclosure Statement: A general Disclosure Statement that the broker must provide the client before the client decides to provide the broker with instructions.

Dishonour: To refuse to pay, or be unable to pay, an amount that is owing.

Diversify: To diversify is to make sure you have your money spread over a range of different types of investment to ensure the failure of one will not mean that you lose all of your money.

Dividend: The portion of a company's profit paid to shareholders.

Emergency fund: A reserve of cash kept available to meet the costs of any unexpected financial emergency.

Encumbrance: When there is money owed on a property there is said to be an encumbrance on that property. When you purchase a home, your solicitor will make sure you have clear title to it so there is no encumbrance on it.

Endowment: A gift of money or property given for a specified purpose.

Endowment funds: Investment funds established for a specific reason.

Endowment policy: A type of life insurance policy where the life insurance is linked with a savings or investment component. When you reach a predetermined age, you receive a lump sum.

Enduring Power of Attorney (EPOA): A legal document which sets out who can take care of your personal or financial matters if you can't. Unlike a standard Power of Attorney, the EPA is not revoked when the donor loses their mental capacity. There is an EPOA for Personal Care and Welfare and another EPOA for Property. The EPOA is revoked upon the death of the donor.

Exchange rate: The price of one country's currency expressed as a proportion of another country's currency.

Expenses/Expenditure: The money you spend on daily living including regular bills such as insurances, car registration etc.

FAP: A Financial Advice Provider that is licensed to provide financial services by the Financial Markets Authority.

Finance charge: The total cost of credit a customer must pay on a loan. Often it will just be a list of the fees involved in the setup and maintenance of that loan but, technically, the finance charge should include interest.

Finance company: A company whose business is to make loans to individuals. It is different from a bank in that it does not receive deposits like a bank.

Financial institution: An enterprise such as a bank whose primary business and function is to collect money from the public and invest it in financial assets such as stocks and bonds.

Fixed-rate loan: A loan where the interest rate is fixed for the life of the loan.

Fixed Term: A part of a mortgage that is fixed for an agreed period (6 months to 5 years) at an agreed interest rate.

Floating mortgage: A mortgage or part thereof where the interest rate is not fixed, and the higher floating or variable interest rate is charged.

FMA: Financial Markets Authority. The finance industry regulatory authority.

Goal: A financial or life objective. Goals need to be short, medium, or long-term.

Gross income: Your total taxable income prior to any tax or other deductions being taken from it.

Investment: The creation of more money using the money you already have.

Investment manager: A person within an investment company who manages a portfolio of investments.

Investor: A person who invests money.

Invoice: An itemised account of money owed for goods or services supplied.

IRD: The Inland Revenue Department. The government department that collects taxes in New Zealand.

Joint account: An account owned jointly by two or more persons, usually spouses.

Joint tax return: Tax return filed by two people, usually spouses.

Landlord: A property owner who rents property to a tenant.

Lease: A long-term rental agreement for a predetermined time.

Leasehold: An agreement providing the right to use property under a lease agreement as opposed to freehold where the user owns the property outright.

Lend: To provide money temporarily on the condition that it or its equivalent will be returned, usually with an interest fee.

Lender: A business or individual that provides a loan to another party. The most common lenders are banks.

Letter of Offer (LOO): A letter from the lender offering the terms and approval conditions on which they are prepared to advance the loan to the borrower.

Liability: Something for which you are liable. In the financial sense that usually refers to debts you have incurred.

Liability insurance: Insurance guarding against damage or loss that the policyholder, may cause another person in the form of bodily injury or property damage.

Life insurance: An insurance policy that pays a monetary benefit to the insured person's survivors after death.

Life insurance policy: The contract that sets out the terms of your life insurance coverage.

Line of credit (or Revolving Credit): An informal loan arrangement between a bank and a customer allowing the customer to borrow up to a prespecified amount on a regular basis.

Liquid asset: An asset that is easily and quickly turned into cash.

Liquidation: Occurs when a firm's business is terminated. Assets are sold and the proceeds are used to pay creditors. Any cash left over is then distributed to shareholders.

Loss of income insurance: See Income Protection Insurance.

Loan to Value Ratio (LVR): The percentage of loan compared to the value of the security property which is calculated by dividing the amount of the loan by the value of the property.

Maturity: The date at which an investment or loan falls due. The investment or loan are said to mature.

Mortgage: A legal agreement by which a lender lends money at interest in exchange for taking the title of the borrower’s property.

Mortgage broker: A person, independent of any lending company, who represents the interests of the buyer in searching for a mortgage that provides the highest benefit to the buyer.

Mortgage insurance, or mortgage life insurance: A life insurance policy that pays off the remaining balance of the insured person's mortgage at death.

Mortgage rate: The interest rate on your mortgage loan.

Mortgage servicing: When you are actively paying off a mortgage or other debt you are said to be "servicing" that debt.

Mortgage Structure: Dividing a mortgage into parcels and/or loan products.

Mortgagee: The person or company, usually a bank, who gives a mortgage to another. When a person cannot repay a mortgage, the mortgagee will sell the property to recoup their losses, hence the term "mortgagee sale."

Mortgagee Sale: When a lender sells the borrower's property after the borrower defaults on the agreed terms and payments.

Mortgager: The person who takes out a mortgage.

Multiple listing: When a property is listed for sale by more than one real estate company, as opposed to a sole listing.

Negative cash flow: If an individual or a business is spending more than they are earning, they are said to have a negative cash flow.

Net assets or net worth: The difference between an individual or company's total assets and their current liabilities.

Net income: An individual or company's total earnings less the amount deducted for tax, etc.

Net proceeds: Amount received from the sale of an asset after deducting all transaction costs. So, if you sell your house, the net proceeds are the amount of money you have left once you've paid the real estate agent, solicitor's fees, any mortgage owing, and other such costs.

Other income: Income other than your salary or wages, e.g., tax returns, money from boarders, rental income, investment income, etc.

Overdraft: The provision of instant credit by a lending institution. Regarding your bank, this means that once your overdraft facility is approved, you can spend up to the approved limit without further reference to the bank. You will be charged interest, calculated daily, on the amount you are in overdraft.

Payee: A person receiving payment through any form of money transfer method.

Payer: The person making a payment to a payee.

Personal income: Total income received from all sources, including wages, salaries, rents, and the like. It may be expressed in a gross or net figure. See Gross Income and Net Income.

Principal and Interest (P & I): The mortgage on your home may be an interest-only loan, but is more likely to be a P & I (principal and interest) loan. That is, your regular repayments are going towards paying portions of both principal and interest.

Policyholder: An individual who owns an insurance policy.

Post Approval: The process that follows the lender's approval of the loan that needs to be carried out so that the loan can be advanced to the borrower.

Power of attorney: A written authorization allowing a person to perform certain acts on behalf of another, such as moving assets between accounts or trading for a person's benefit. The Power of Attorney is revoked when the donor loses their mental capacity. (See Enduring Power of Attorney).

Principal: Loan repayments will usually be made up of principal and interest. The principal amount is the original amount the loan was taken out for.

Progressive Tax: An income tax system in which tax brackets vary according to income, with higher-income earners being charged a larger rate of tax than lower-income earners. New Zealand uses a progressive tax system.

Real estate broker: An intermediary who receives a commission for arranging and facilitating the sale of a property for a buyer or a vendor.

Refix: Fixing existing lending with the same lender.

Refinance: Moving lending from one lender to another.

Reverse mortgage: A type of mortgage in which a homeowner borrows against the value of their home while retaining title and making no payments while residing in the home. When the owner ceases living in the house, the property is sold, and the loan repaid.

Revolving credit or revolving line of credit: An informal loan arrangement between a bank and a customer allowing the customer to borrow up to a pre-specified amount.

Salary: Regular and constant income received from your employer, as opposed to wages, which can vary according to hours worked, etc.

Security: The property that the loan is secured by, where the lender registers a mortgage over the title of the property.

Security Swap: When a borrower purchases a new property and the security is changed between the properties without affecting the borrowing.

Seller's market: Usually referring to property, a market in which demand exceeds supply, i.e., there are more people wanting to buy a house than there are houses for sale. As a result, the seller can dictate the price and the terms of sale.

Settlement: When payment is made for a trade.

Settlement date: The date on which payment is made to settle a trade. This term is often used when purchasing a property. The settlement date is the day on which all money is paid to the vendor, title deeds are assigned to the purchaser, and keys are passed to the purchaser.

Share broker: A person whose business it is to buy and sell shares on behalf of others. They usually charge a fee according to the number of shares traded.

Shareholder: A person or entity that owns shares in a business or company.

Shares: Certificates or book entries representing ownership in a business. In the USA, shares are called stock, hence they refer to the stock market and stockbrokers, etc.

Speculator: A person who buys and sells commodities with the sole purpose of making a profit. Hence, you may speculate through shares, property, gold, or any commodity that appreciates in value.

Spending leaks: Money that you spend during the day that is not accounted for and, with greater thought given to its use, could be turned into a saving.

Action Plan: A plan on which you record your income and expenditure to see exactly where your money is coming from and where it is being spent to see where you can save money.

Share market: The market on which shares are traded. Also referred to as the stock market.

Tax deduction: The amount that is taken from your gross income and paid to the IRD (Inland Revenue Department).

Tax evasion or tax avoidance: The avoidance of paying tax. Can lead to big trouble if you're caught!

Taxable income: Gross income less any pre-tax deductions.

Term life insurance: As opposed to an endowment policy, a term life policy pays out a sum on the death of the insured, but there is no cash build-up or investment component. Usually, the premium remains constant only for a specified term of years, and the policy is usually renewable at the end of each term.

Term loan: A bank loan that has a specific term applied to it. Most loans are for specific terms.

Test Rate: The interest rate a lender uses in their UMI calculator to assess affordability.

Trail Commission: Monthly commission paid over the term of the mortgage to the mortgage broker.

Uncommitted Monthly Income (UMI) Calculator: A calculator used by lenders and mortgage brokers to assess the borrower's ability to afford a loan based on the lender's loan criteria.

Unencumbered: A property that has no encumbrance or lender's security instrument (mortgage) attached to it. See Encumbrance.

Unsecured debt: Debt that does not identify specific assets that the person or company who loaned the money is entitled to in case of default.

Vendor: The person selling an asset or commodity. So, when a house is sold, there is a buyer who purchases it and a vendor who sells it.

Wet Signature: A signature that has been manually signed on a document, which is then posted or scanned and emailed to the broker/lender. Required for all non-bank 2nd tier lenders due to AML requirements.

Will: A legal declaration of a person's wishes regarding the disposal of their property or estate after death.