GLOSSARY OF TERMS

  • ACCEPTANCE

To agree to the terms of an offer or a contract.

  • ACCRUED

Interest you have earned or incurred that is yet to be paid to you or charged out.

  • ACTIVE FUND

Active funds have money managers who aim to get investors the best results by choosing investments and trading them. This typically costs more, but if the fund managers are successful, it may be worth it. Passive funds are more ‘hands off’ than active funds – they simply follow a market’s performance without the fund managers choosing investments and trading often. This generally makes them cheaper, so the costs eat less into the results.

  • ACTIVE FUND MANAGER

A money manager whose style is to get investors the best results by choosing investments and trading them. They typically have teams of experts to analyse all the available information, and also make important decisions around currency, and asset allocations to improve investment returns.

  • ADJUSTMENTS

The process of allocating expenses (e.g. Council, electricity, phone, water rates) on settlement day that the seller has paid for but not used, and which the buyer has not yet used but will be billed for.

  • ADVISER

Someone who sells their financial advice which may include the promotion of financial products (like insurance managed funds or a home loan). They include financial advisers, insurance agents, planners, share brokers, mortgage brokers and bank managers or agents. They may be salaried, paid a commission or have an hourly rate.

  • AMORTISATION

The amount of the loan payment multiplied by the number of equal periodic payments calculated to pay off the debt at the end of a fixed period. This amount includes accrued interest on the outstanding balance.

  • AMORTISATION PERIOD

To agree to the terms of an offer or a contract.

  • AMORTISATION SCHEDULE

This is the formal name for the repayment schedule that shows each of your mortgage payments with a breakdown of how much is applied to principal and how much is applied to interest.

  • ANNUITY

A payment at regular intervals of a certain amount of money for a term of years or during the life of an individual.

  • AP

Automatic payments are a way of paying someone a set amount direct from our bank account, usually on a fixed day of the month. Automatic payments are ideal for bills that are the same amount each month, like rent. They are also perfect for paying ourselves first and saving towards our goals.

  • APPLICATION FEES

Fees that are charged to cover or partially cover the lender’s internal costs of setting up a loan.

  • ARREARS

An overdue account that is yet to be paid.

  • ASSETS

Everything that a person or a company owns or has a right to, from which a benefit can derive, examples include property, shares, savings accounts that earn interest. Net assets are assets that are in excess of liabilities. Liquid assets are assets either in the form of cash or that are readily convertible into cash.

  • ASSET ALLOCATION

The mix of investments we choose in order to get certain results. Typical mixes are from the main asset classes. If we are a growth investor, for example, our asset allocation will include more growth assets such as shares and property.

  • ASSET CLASSES

Kinds of investments, e.g. shares, property, bonds, cash deposits.

  • AT CALL

Funds which can be withdrawn on demand or without giving notice of intention to do so.

  • ATM

Automatic Teller Machine.

  • AUCTION

The public sale of property with ownership given to the highest bidder, subject to a reserve price being reached.

  • BAD DEBT

A debt with little chance of being recovered and that is then written off as a loss.

  • BALANCE SHEET

A statement of assets, liabilities and net equity for any enterprise taken at a given point of time.

  • BALLOON PAYMENT

A large loan repayment made in order to clear a debt. Usually applied to a short-term fixed-rate loan, which involves small payments for a certain period of time with one large payment for the remaining amount of the principal at a time specified in the contract.

  • BANK CHEQUE

A cheque that draws money specifically from funds you own held in a bank account.

  • BANKRUPTCY

When a debtor has his/her estate placed into the hands of a receiver who then has the responsibility for distribution of the estate.

  • BEARER

A person presenting a cheque to a bank for payment.

  • BILL OF EXCHANGE

A bill of exchange is a negotiable written order for payment of a specified sum to a designated person. Bills of exchange are commonly used in international trade. The person receiving a shipment of goods must pay the sum specified in the bill before taking title to the goods. Bills of exchange are often purchased by banks at a discount, and they may pass through several hands before redemption. It is sometimes called a bank draft.

  • BILL OF SALE

A written agreement whereby ownership of property is transferred but the original owner is allowed to retain possession.

  • BLUE CHIP STOCK

Shares in a well-established company that are highly regarded in financial circles.

  • BODY CORPORATE

A corporation of the owners of units within a strata building. The owner’s form a self-elected council for the management of the building and common areas.

  • BREAK FEE

A cost charged by a lender for the early repayment of a mortgage, such as when we leave a fixed term mortgage early to move to a lower interest rate.

  • BRIDGING FINANCE

A short-term loan that covers a financial gap I time between the purchase of a new property and the sale of an old property.

  • BROKER

An individual whose business it is to assist and arrange funding or negotiation of contracts for a client but who is not responsible for lending the money himself. Brokers generally charge a fee or receive a commission for the services they perform.

  • BUSINESS FINANCE

Business finance concerns a firm’s acquisition of funds and the management of these funds for various operations.

  • CAPITAL

The current value of your long-term assets i.e. house, property or business.

  • CAPITAL GAIN

The monetary gain that is obtained when you sell an asset for more than you paid for it.

  • CAPITAL GROWTH

The increase in value of an asset or investment i.e. the difference between the current values and the original purchase price (provided the result is positive, not negative).

  • CAPITAL GAIN

The profit we make when we sell an investment for more than we paid for it. If we buy a house for $300,000 and sell it for $320,000, our capital gain is $20,000. A capital loss is when we sell an investment for less than we paid for it.

  • CAPITAL GUARANTEED

An investment where your money (principal) is guaranteed safe; usually by a bank, government body, or life insurance company.

  • CAPPED LOAN

A loan where the interest rate is not allowed to exceed a set level for a period of time. Unlike fixed rate loans, the interest rate is allowed to drop.

  • CASH ADVANCE

A cash advance is when we withdraw money from our credit card account, usually through an ATM. Cash advances are an expensive option because we get charged a higher interest rate, typically from the day we withdraw the money.

  • CAVEAT

The Latin for 'beware'. Usually a caveat is in the form of a contract clause that stipulates a particular requirement.

  • CAVEAT EMPTOR

Latin for 'let the buyer beware', or in Australia 'you pay your money and you takes your chances'

  • CERTIFICATE OF TITLE

This document details of the land dimensions and ownership details, and whether there are any encumbrances on it.

  • CHATTELS

Chattels are personal property. There are two types of chattels. Real chattels include buildings and fixtures. Personal chattels include clothes and furniture.

  • CHEQUE

A cheque is a written order from a cheque-account depositor directing his or her bank to make funds available to a specified person or to 'cash' (anyone presenting the cheque for payment). A cashier’s cheque is drawn by a bank against its own funds. Unlike a personal cheque, it has unquestioned validity. A Traveller’s Cheque is a form of cashier’s cheque. Cheques are convenient to carry and use, are less subject to theft than cash, and serve as receipts after they are processed and returned.

  • A bank receiving a cheque drawn on another local bank sends it through a local clearinghouse, which then adjusts the customer’s bank accounts.

  • COMMISSION

The money we pay to a broker, real estate agent, financial adviser or planner who sells on behalf of a company (like insurance, real estate). Commission can be based on the number or the value of the products they sell.

  • COMMITMENT

An agreement which is often put down in writing, between a lender and a borrower to loan money at some future date subject to the completion of paperwork or compliance with stated conditions.

  • COMPOUND INTEREST

Interest paid on interest. We earn compound interest when we have savings and don't spend the interest we earn on those savings. Over the long term, compound interest makes our money grow faster. Unfortunately it can also work against us when we carry debt, where the costs compound instead. The more we put off paying it back, the more we end up paying.

  • CONSUMER PRICE INDEX (CPI)

Measures the national inflation rate. The index is measured quarterly (December, March, June and September quarters) and reflects changes in prices (up or down) of a fixed 'basket' or list of goods and services.

  • CONVEYANCING

The legal process for the transfer of ownership of real estate.

  • COST OF CREDIT

An expression used, although not defined, in the Credit Code in relation to advertising for consumer credit. The cost of credit refers to interest rates, amounts of fees and charges and may also extend to comparative descriptions with competing products.

  • COUNTERSIGNED

Additional signature or signatures that guarantee the validity of a document.

  • COVENANT

Terms and conditions that specify the usage of a block of land or the buildings on the land.

  • COVER

The amount of protection our insurance gives us.

  • COVER NOTE

A note of temporary property insurance put in place before the implementation of a formal policy.

  • CREDIT BORROWED

Money that is to be paid back under an arrangement made with a lender. Also, a sum of money that is paid into an account.

  • CREDIT FEES AND CHARGES

Fees and charges which become payable in relation to a credit contract or mortgage excluding interest charges, transaction fees, government charges and duties on deposits and withdrawals.

  • CREDIT LIMIT

The maximum amount of credit the borrower can use at any one time.

  • CREDIT RELATED INSURANCE

Home buildings insurance that is taken out in relation to a credit contract, whether financed under the credit contract or not.

  • CREDITOR

A party to whom money is owed. (The party owing the money is known as the debtor).

  • CROSSED CHEQUE

  • A cheque with two parallel lines drawn vertically across, indicating that it must be paid into an account and cannot be cashed.

  • DAILY INTEREST

Interest that is calculated on a daily basis - therefore varying according to the daily account balance.

  • DEBIT

An account entry to charge a withdrawal to a specified account.

  • DEBT

  • A debt, in finance, is the obligation to pay someone a sum of money. Usually a debt arises from a transaction in which one person (the debtor) receives something (e.g. goods, services, or money) from another person (the creditor). In return, the debtor promises to repay later under terms which are pre-arranged.

  • Most debts include a promise to pay INTEREST at a specified rate.

  • If a debtor fails to meet their repayment obligations, the creditor may take legal action to enforce payment or otherwise seize property in lieu of payment. In one procedure a JUDGMENT is obtained through a court process against a debtor, requiring that payment be made. If the debtor still fails to pay, state laws provide that the sheriff or some other law-enforcement agency may seize the debtor’s property and dispose of enough of it to pay the sum owed, plus any legal costs incurred in doing so.

  • DEBENTURE

A type of fixed interest security, issued by companies (as borrowers) in return for medium and long-term investment of funds. Debentures are issued to the general public through a prospectus and are secured by a trust deed that spells out the terms and conditions of fund-raising and the rights of debenture holders. Typical issuers of debentures are finance companies and large industrial companies.

  • A type of fixed interest security, issued by companies (as borrowers) in return for medium and long-term investment of funds. Debentures are issued to the general public through a prospectus and are secured by a trust deed that spells out the terms and conditions of fund-raising and the rights of debenture holders. Typical issuers of debentures are finance companies and large industrial companies.

  • DEBT CONSOLIDATION

Taking advantage of lower interest rates that may be available by the grouping of multiple loans into one, lower interest rate loan.

  • DEBTOR

Someone who owes money to someone else.

  • DEED

A legal document that states an agreement or obligation relating to a property.

  • DEFAULT

A failure to meet legal obligations in a contract, specifically, failure to debt repayments on a due date.

  • DEFAULT FUND

See ‘KiwiSaver default fund’

  • DEFERRED ANNUITY

An annuity where income payments do not commence i.e. payments are deferred until some specified date in the future.

  • DELINQUENCY

Failure to make payments on time. This can lead to foreclosure.

  • DIRECT DEBITS

Direct debits are a way of paying someone a variable amount direct from our bank account, usually on a fixed day of the month. Direct debits are ideal for bills that are a different amount each month – like telephone and power bills. They can also be used for personal savings.

  • DIVERSIFICATION

Not putting all our eggs in one basket, or spreading our risk by choosing different individual investments within an asset class. So instead of us buying a single share worth $800, we can buy 80 shares worth $10 in different companies, industries and countries around the world.

  • DIVIDEND

The share of profits that are distributed to shareholders of a publicly listed company.

  • DIVIDEND IMPUTATION

A tax system, where dividends paid by a taxpaying Australian company to its shareholders, carry a credit for the tax the company has already paid on its profits. This means that shareholders receive a reduction to the tax normally payable.

  • DOWN PAYMENT

Money paid to make up the difference between the purchase price and the amount of the mortgage (or borrowings). Down payments are usually ten to twenty percent of the sales price on Conventional loans, with some products offering ‘no money down’ up to five percent down payment terms.

  • EARLY TERMINATION PAYMENT

The cost applied when paying out a loan early.

  • EARNEST MONEY

Money given by a buyer, to a seller as part of the purchase price in order to bind the transaction or assure payment.

  • EASEMENT

A right to use a corridor or passage of land which is owned by another party.

  • EMPLOYER CONTRIBUTIONS

What our employer puts into our KiwiSaver account (if we’re an employee). In addition to contributions from our wages and the government, employers are required to put in at least 3% of employees’ pay (before tax).

  • ENCUMBRANCE

An outstanding liability or charge (money owed) on a property.

  • ENFORCEMENT EXPENSES

The costs involved in the recovery of a debt under a credit contract, mortgage or guarantee. Enforcement expenses can include insurance, rates and taxes payable for the property, but only if those expenses are incurred after a breach occurs.

  • ENFORCEMENT PROCEEDINGS

Actions taken such as court proceedings, to recover money under a credit contract or guarantee, taking possession of mortgaged property or any other action taken to enforce a mortgage.

  • EQUITY

The amount of something we own, typically in a property or business. If we sold the asset and paid back any money we owed on it, our equity would be what’s left. For example, if we have a house worth $350,000 and a $300,000 mortgage, our equity in the house is $50,000.

  • EQUITY (FINANCE)

In finance, equity is the capital furnished by the owners or shareholders of a business firm. It is distinguished from debt, or funds supplied by the firm’s lenders and other creditors. On the firm’s financial statements, equity is equal to its net worth. When the company’s debts have been paid, the owners of equity are entitled to all the remaining earnings and property of the company.

  • EQUITY LOAN

A loan usually secured by the proportion of the value of your house which you own.

  • EQUITY MORTGAGE

A loan secured by the part of the value of an asset (usually house) which you own.

  • ESTABLISHMENT FEES

Lending body fees which may or may not be charged to set up a loan.

  • ESTATE

Everything we own at the time of our death. Our KiwiSaver accounts are also part of our estate.

  • EXCESS

The amount we agree to pay when we make an insurance claim. For example, if the excess on our car insurance is $250 and we have an accident that causes $750 damage, we pay $250 and the insurer will pay anything above that, in this case $500.

  • FEES

The costs we pay for financial services, such as credit cards, mortgages or fund management. These can be fixed (a set amount per month or for setup) or a percentage (based on the amount of funds being managed or the returns). It’s important to factor these fees in when we’re gauging whether a decision is worth making.

  • FINANCE COMPANY

Finance companies make cash loans to consumers and also make loans for purchases of durable goods, which are then security for the loans. In addition, they finance consumer purchases by purchasing instalment credit contracts that retailers have negotiated with buyers.

  • FITTINGS

Items that can be removed from a property without causing damage to it.

  • FIXED INTEREST

An interest rate that is set for an agreed period of time.

  • FIXED INTEREST INVESTMENTS

Long-term, interest-earning assets, such as bank term deposits and bonds. These investments are generally lower risk, and offer a reliable return that can be used as income.

  • FIXED RATE

Interest paid on a mortgage can be either a fixed rate or a floating rate, which means it either stays constant for a time or moves up and down variably. For a fixed rate loan, the interest rate is set at the date we take out our loan and remains the same throughout the agreed term, irrespective of whether bank interest rates rise or fall.

  • FLOATING RATE

Interest paid on a mortgage can be either a fixed rate or a floating rate, which means it either stays constant for a time or moves up and down variably. For a floating rate loan, if interest rates fall, so does the amount we have to repay. Or we can choose to continue with the same level of repayment and reduce the term of our loan. However, if interest rates rise, then the opposite effect happens, and either we’ll need to increase our repayments or lengthen the term of our loan.

  • FIXED RATE LOANS

As the name suggests, fixed rate loans have fixed interest rates (or an interest rate which does not fluctuate) for the period of the loan. The term of these loans is normally between one and five years, although some lenders offer ten-year fixed rate loans. Many borrowers feel more secure knowing that their repayments will not change during the term of the loan, however, if interest rates go down, borrowers may lose considerable savings which would have resulted from a variable rate loan. Fixed rate loans in general do not offer the value added features that variable loans do. Borrowers should be aware that most lenders do not allow extra repayments, or the use of an offset account with fixed rate loans. Some do not even allow fortnightly repayments. At the end of the fixed period, most loans revert to the standard variable rate of the time, unless the borrower chooses to fix for another term, at the prevailing fixed interest rates.

  • FIXTURES

These are items that would cause damage to a property if they were removed. Their removal must be set out in the contract of sale and any damage incurred is to be made good by the seller.

  • FREEHOLD

The dwelling and the land on which it stands is owned by the owner indefinitely.

  • FROZEN ACCOUNT

An account in which all transactions have been suspended.

  • GARNISHEE

To legally divert a part or whole of someone’s money or property to someone else, for example, to pay child support to the caring parent of a child.

  • GEARED EQUITY INVESTMENTS

Recently approved plan to build wealth, using tax dollars, with minimum cash outlays.

  • GEARING

The ratio of your own money and borrowed funds in an investment.

  • GROSS MONTHLY INCOME

The total amount earned per month, before any expenses are deducted.

  • GUARANTEE

A promise made as bound by the terms of a contract.

  • GUARANTOR

A party who agrees to be responsible for the payment of another party’s debts should the original party fail to pay or perform according to a contract.

  • HIGHEST BID

The top price offered by a bidder at auction. If the reserve price is not reached and the property is passed in, the highest bidder is given the first option to negotiate with the vendor on a purchase price.

  • HOLDING DEPOSIT

A deposit that is refundable based on the goodwill of the buyer to go ahead with the purchase.

  • HP

Hire purchase is an agreement to borrow to buy a product on credit, and we can take it home and use it while we’re paying it off. With HP we usually pay a deposit followed by monthly payments (including the interest and fees charged) over a set period. HP can also be called a credit sale or a credit contract.

  • INCOME STATEMENT

A statement indicating income and expenditure for a period, usually a year.

  • INFLATION

Inflation is the rate at which the prices of goods and services increase over time. This reduces our money’s purchasing power. For example, if we buy something worth $1,000 now, and inflation were at 2%, in one year’s time we would need $1,020 to buy that same thing. This makes it important to invest in a way that at the least outpaces inflation, so that we are not rolling backwards but rather truly getting ahead.

  • INFLATION-ADJUSTED

Increasing an amount of money each year by the same amount as inflation. For example, if we saved $1,000 last year, and the rate of inflation for the 12 months was 2%, we should increase this year's savings by 2% in order to maintain the value of our savings. So $1,000 inflation adjusted becomes $1,020.

  • INTEREST

The lending body’s charge for the use of funds advanced or the return on deposited funds.

  • INTEREST ONLY

Usually a short-term arrangement whereby payments are made on the interest only, not on the principal.

  • INTEREST

Interest is the money we pay to use other people’s money. If we are using the bank’s money (by taking a loan), we pay them interest. If the bank is using our money (such as in a savings account) they pay us interest.

  • INTEREST RATES

The amount of interest we pay on a loan or are paid for an investment, usually expressed as a percentage. Seemingly small changes in these rates can make huge differences over time.

  • INTEREST ONLY LOAN

A loan where the principal is paid back at the end of the term and only interest is paid throughout the term of the loan. The loans are usually for a short term (one to five years).

  • INTERMEDIATE-TERM FINANCING

When a firm needs financing for a somewhat longer period (typically 1 to 5 years), it often turns to so-called term loans, generally from commercial banks and life-insurance companies. A term loan is covered by a contract in which the borrower agrees to repay the principal and interest over a period of 1 to 5 years, usually in instalments. Alternatively, a company can lease assets. LEASING enables a firm to contract for the use of equipment without purchasing it.

  • INTERNAL RATE OF RETURN

A measure of the return on an investment (or loan) which takes into account the time value of money by showing the rate of interest at which the present value of future cash flows is equal to the cost of the investment or loan.

  • INVENTORY

A list of items included with the property, for example furniture, movable items, etc.

  • INVESTMENT BONDS

A lump sum investment product. Technically, an investment or insurance bond is a single premium lump sum investment, life insurance contract.

  • INVESTOR

Money source for a lender.

  • INVESTOR PROFILE

They type of investor we are, based on our capacity to invest, attitude toward risk and time horizon (duration). Our investor type will determine what mix of investments we choose, since different kinds of investments work in different ways and are suited for different purposes.

  • KIWISAVER DEFAULT FUND

A handful of conservative funds picked by the government, for KiwiSaver members who have not yet chosen the fund that suits them best. When someone is opted into KiwiSaver, such as when they start a first job, they are automatically funnelled into one of these default funds until they actively choose the fund they want to be in.

  • LEASE

A document granting a period of tenancy of a property under specific terms and conditions as set out in the Lease Agreement.

  • LIABILITIES

Someone’s debts or obligations. In law a liability is an obligation arising from a contract, from the customary law of TORT, or from a specific statute. An example of a contractual liability is the obligation of a partner in a business to pay the firm's debts.

  • LIABILITY

Something that drains money from our pockets; the opposite of an asset. Most things we buy each day are liabilities, but the goal of investing is to buy assets instead. For example, a holiday is a liability (even if it’s a good one) and a bond is an asset (as long as it returns something to us). Liability can also refer to a debt or a promise to pay money for something in the future.

  • LIQUIDITY

When we invest, we buy assets to gain returns. Liquidity refers to how easily we can turn our investments back into cash afterwards. Shares are more ‘liquid’ because they can be sold on a market quickly; property is less so because it can take some time to sell a house.

  • LINE OF CREDIT

A flexible loan arrangement with a specified ceiling to be used at a customer’s discretion.

  • LOAN

Money we borrow to use over a set period of time. To do this, we typically pay a setup fee and a certain rate of interest as we pay back the borrowed amount over time.

  • LOCKED IN

Being unable to remove our money from an investment or savings scheme without paying some kind of penalty. Usually an investment is locked in for a certain period – a number of years, months or until an event, like our retirement. For example, if we make a six-month fixed-interest investment at the bank, our money is locked in for six months.

  • LOAN TO VALUATION RATIO (LVR)

The ratio of the amount of the mortgage loan to the valuation of the security (usually the property).

  • LONG-TERM FINANCING

Permanent or long-term funds are obtained by selling securities. Securities are of two kinds: EQUITY, or STOCK, and DEBT, or BONDS. Bonds carry a specific interest rate that is paid periodically until the obligations mature, at which time the principal is repaid. Equity is ownership in the firm and carries no specific rate of return; if the firm is an Incorporated Company, the equity is represented by stock, the holders of which are entitled to share in the profits of the business. The common stock of companies owned by the general public is bought and sold in the Stock Market.

  • LOW START LOAN

A loan where the initial repayments are low and increase over time.

  • LUMP SUM

A large, one-time payment of money to pay off a debt or invest in a fund. Typically these will save us significant amounts of interest for debt or help us leap forward with investing.

  • MANAGED FUNDS

Pools of investors’ money that are invested by specialist fund managers. KiwiSaver is a common example. With a managed fund, we’re able to spread our investments much more widely than we could typically do by ourselves, with less money needed to get started.

  • MANAGEMENT OF FUNDS

A company must allocate its available funds among various uses on the basis of financial plans. Such plans assume that the funds spent will produce sufficient profits in order to pay the interest on debt capital and to earn a satisfactory income to the owners on their equity capital. Another task of business finance is the management of a company’s surplus funds. Proper analysis and planning are necessary to assure that the funds will be available where they are needed in the business at a future date.

  • MARGIN

The difference between the lender’s interest indicator rate (or other reference rate) and the rate actually charged to borrowers.

  • MARKET VALUE

The highest price that a buyer would pay and the lowest price a seller would accept on the sale of a property. Market value may be different from the price a property could actually be sold for at a given time.

  • MATURITY

The date on which a debt or other borrowing is due to be repaid in full.

  • MONEY

Money cannot be defined as some particular object but must instead be defined by the functions it serves - to act as a medium of exchange and a standard of value.

  • MORTGAGE

A form of security for a loan usually taken over real estate. The lender, the mortgagee, has the right to take the real estate if the mortgagor fails to repay the loan. The mortgage creates a lien on the property as security for the debt.

  • MORTGAGE INSURANCE

Money paid to insure the mortgage in most cases where the down payment is less than twenty percent.

  • MORTGAGE OFFSET

A non-interest earning account that is offset against a home loan to reduce the total interest payable.

  • MORTGAGEE

The lender of funds.

  • MORTGAGOR

The person borrowing money in the terms of a mortgage.

  • MTC

Member Tax Credit – the government’s annual contribution to our KiwiSaver accounts, matching 50 cents for every dollar we put in, up to $521 each year. (The term actually has nothing to do with tax).

  • NEGATIVE AMORTISATION

Occurs when the monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortisation is that the borrower ends up owing more than the original amount of the loan.

  • NEGATIVE GEARING

A way of obtaining tax advantages through an investment where the deductible expenses (typically including interest) exceed the income derived from the investment.

  • NEGOTIABLE INSTRUMENTS

Certain kinds of business documents, or paper, can be exchanged for money because they enable their holders to obtain legal interests on the basis of the documents themselves. NEGOTIABLE INSTRUMENTS are usually classified under the following three groupings:

  • 1) commercial paper, which includes formal documents involving a promise (e.g.  a promissory note) or order (e.g. a cheque) to pay a sum of money;

  • 2) commodity paper, which represents an ownership interest in property held by another such as a trucker or shipper (for example, a bill of lading); and

  • 3) investment paper, which includes stocks and bonds.

  • NET INCOME

The borrower’s gross income minus income tax.

  • NET WORTH

Net worth is the value of holdings after liabilities are satisfied.  Our overall financial position - the difference between what we own and what we owe, or the value of our assets minus our debts. It helps to focus on whether our net worth is trending upwards and what we can do to keep it doing so.

  • NOMINAL RETURN

The money we get back from an investment, without taking inflation into account. Our ‘real’ return, instead, includes the effects of inflation. If our investment achieved a nominal return of 5% and inflation was 2%, our real rate of return is 3%. This is good to keep in mind when looking at term deposit rates, for example.

  • NZ SUPER

New Zealand Superannuation is the pension that the government currently pays to all eligible New Zealanders aged 65 or over. To be eligible for NZ Super we need to be a legal resident of New Zealand, having lived here for at least 10 years since turning 20. Five of those years have to be since age 50.

  • OCR

Official Cash Rate – the interest rate set by the Reserve Bank to influence the price of borrowing money in New Zealand. It is also a tool that influences the amount of economic activity and inflation. Changes in the OCR can affect how much interest we pay on our mortgage and how much we earn on our savings.

  • OPTION TO BUY

A legally binding document which gives a person, for a fee, the right to buy something usually within a specific time frame at a specific price.

  • ORIGINATION FEE

The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property. This is usually calculated as a percentage of the value of the mortgage.

  • OVERDRAFT

A pre-arranged limit to which a person can exceed an account balance.

  • PASSED IN PROPERTY

Is 'passed in' at auction if the highest bid fails to meet the reserve price set by the vendor.

  • PASSIVE FUND

Passive funds are more ‘hands off’ than active funds – they simply follow and track the performance of a given market, avoiding the costs of their fund managers choosing investments and trading often. This generally makes them cheaper than active funds.

  • PASSIVE FUND MANAGER

A money manager whose style is more ‘hands off’ than an active manager, essentially having set asset allocations for each fund. They generally set up their funds to follow the performance of a given market (an index). As a result they can keep their costs of running a fund down.

  • PAYEE

The person or entity to which a cheque is payable.

  • PAYMENT

The periodic payment due on a mortgage loan each payment period (normally a month) to cover accrued interest and to repay a portion of the principal balance. Most mortgages are set up where the payments will reduce the principal balance a little with each payment until the balance is zero when the last payment is made.

  • PENSION

An income paid at regular intervals to a retired person, by a government or a superannuation scheme.

  • PER ANNUM

Yearly. Per annum is often shortened to p.a.

  • PIE

A Portfolio Investment Entity is a type of savings or investment fund that has special tax advantages. KiwiSaver default funds are examples. When we save through or invest in a PIE, we pay either 0%, 10.5%, 17.5% or 28% tax on our share of the returns, depending on our income.

  • PIR

Prescribed Investor Rate – the tax rate for our investment earnings from a PIE such as KiwiSaver. It’s important to let our KiwiSaver provider know ours.

  • POLICY

The written contract between us and our insurer.

  • POWER OF ATTORNEY

A legal document authorising one person to act on behalf of another.

  • PREMIUM

The regular amount we pay for insurance.

  • PRINCIPAL

The capital sum borrowed on which interest is paid. The principal amount of the loan is the amount still owed on the loan. As you make payments, only a portion of each payment is applied to the principal; the rest is applied to interest.

  • PRINCIPAL AND INTEREST LOAN

A loan in which both the principal and the interest are paid during the term of the loan.

  • PRIVATE SALE

The sale of a property without an estate agent.

  • PRIVATE TREATY SALE

A property sale where the buyer negotiates on a price set by the seller.

  • PROVIDER

A company such as a bank, finance or insurance company that creates and provides insurance, mortgage, banking, savings or investment products. KiwiSaver providers, who are fund managers, are an example.

  • RATE OF RETURN

What you earn on your investment as a percentage of the amount you invested. For example, if you buy a house for $300,000, and it makes you $15,000 from rent each year (after all the running costs have been paid), the rate of return on your asset (the house) is 5% ($15,000 is 5% of $300,000).

  • REAL RETURN

The money we get back from an investment, including the effects of inflation. If our investment achieved a nominal return of 5% and inflation was 2%, our real rate of return is 3%. This is good to keep in mind when looking at term deposit rates, for example.

  • RECISION

The cancellation of a contract.

  • RECEIVER

A receiver is a person appointed by a court to take control of the assets and income of a company or individual while litigation is pending involving either, as in a BANKRUPTCY proceeding. The court may appoint a receiver when a creditor offers proof that action is needed to conserve the assets of the firm or person. Such a receiver collects income and makes disbursements from the funds in his or her custody only as authorized by the court. In a bankruptcy proceeding, the court may later appoint a TRUSTEE either to liquidate the assets or to run the company until a reorganisation can take place.

  • REFINANCING

To replace or extend an existing loan with funds from the same institution or another. This can be done to obtain a lower interest rate or simply to ‘pull out’ part of the equity the borrower has already built up in the mortgage.

  • REFINANCE

Working with a lender to change the terms of our loan or replace our loan. This often involves switching lenders to get a better deal.

  • RETURN

What we ‘get back’ when we invest. This can be due to the change in the value of our investment over a period of time, or the value of any income we receive from it (e.g. dividends from shares or rental income from property). Or both! Returns can be both positive and negative, and there is always a balancing act between risk and return. The higher returns we chase, the more risk we have to shoulder.

  • RESERVE PRICE

The specified minimum price that is acceptable to a seller at auction of property.

  • RIGHT OF WAY

Can be either somebody’s right to cross other property or a general pathway across your land.

  • RISK

The chance that we might not reach our goals by investing. An investment may not be as good as we expected or were promised. It means that we might not get some or all of our original money back and might not get any additional returns (e.g. interest or dividends or capital growth). Risk is also partly about the ups and downs in value that an investment can have, which is called ‘volatility’. Risk can also be measured by how your investment or savings keep up with inflation. That is the dollar you have today is able to buy the same goods in the future.

  • RISK PROFILE

See ‘investor profile’.

  • ROLLOVER

The renewal of a loan facility or continuation of a deposit at each maturity date, usually including a revision of the interest rates. (The term is also used to describe the transfer of Eligible Termination Payments to an acceptable superannuation or rollover fund.)

  • SCHEME

A fund or group of funds managed by a provider, such as a KiwiSaver scheme.

  • SEARCH

An examination to confirm that a vendor is in a position to sell a property and that there are no encumbrances on it.

  • SECURED LOAN

A loan that is secured against some or all of a borrower's assets, reducing the lender’s risk. If the borrower fails to make repayments, the lender may get some or all of those assets in order to cover the outstanding loan amount.

  • SECURITIES

A real or virtual document that proves ownership of shares, bonds and other investments. This term is sometimes used interchangeably with ‘investments’ and the shares and bonds themselves.

  • SECURITY

An asset that guarantees the lender their borrowings until the loan is repaid in full. Usually the property is offered to secure the loan.

  • SELF-AMORTISING LOAN

A loan is said to be self-amortising when the payment amount is calculated such that there is no balance at the end of the loan period. Most fixed-rate mortgages are self-amortising loans.

  • SERVICING

All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections etc.

  • SETTLEMENT DATE

Date on which the new owner finalises payment and assumes possession.

  • SHARES

A share in the ownership of a company and entitlement to any dividends. These are sometimes referred to as ‘equities’ or ‘stocks’ as well.

  • SHAREHOLDER

A person who buys a portion of a public or private company’s capital. By doing so that person becomes a shareholder in that company’s assets and receives a share of the company’s profit in the form of dividends.

  • SHORT-TERM FINANCING

  • Sources of short-term financing (funds available to the firm for less than one year) are trade credit, commercial bank loans, and, to a lesser extent, commercial paper. Trade credit is a short-term debt that results from credit sales to the firm. When the company purchases goods on credit, it is in effect borrowing money from the seller; this is an important source of funds for many firms.

  • Sources of short-term financing (funds available to the firm for less than one year) are trade credit, commercial bank loans, and, to a lesser extent, commercial paper. Trade credit is a short-term debt that results from credit sales to the firm. When the company purchases goods on credit, it is in effect borrowing money from the seller; this is an important source of funds for many firms.

  • Commercial bank loans are another major source of funds for many firms, particularly those which need to finance seasonal increases in inventories and provide credit for their customers. Larger companies often sell commercial paper to obtain short-term funds.

  • These unsecured promissory notes are usually issued in large denominations and have interest rates that are competitive with those of other short-term loans.

  • SIGNATORY

A person authorised to utilise an account.

  • SMART DEBT

Low-interest borrowing for assets that build wealth, like a house or an education.

  • SPREADSHEET

A spreadsheet is a computer program designed to facilitate the manipulation of data in the form of words, numbers, or graphical element. The value of a spreadsheet lies in the way it automates processes. This saves time, for example, when a user wants to change a variable and the computer calculates the effect of the change on the entire program. Spreadsheets are popular tools in business, where they now speed up and simplify such procedures as budgeting.

  • STOCKS

Any security traded on a public exchange including fixed interest or equity securities.

  • STRATEGIC ASSET ALLOCATION

See ‘asset allocation’.

  • SUPERANNUATION SCHEME

Funds specifically designed for people saving for their retirement. They are in the form of retail funds available to all savers, or employer funds available only to employees of the sponsoring employer.

  • SURETY

A legal term referring to a person who undertakes to pay money, performs some duty, or assumes some responsibility in case another person (the principal) fails to carry out the terms of a contract. A surety differs from a guarantor (see GUARANTEE) in that the contract of the latter is entered into separate from the principal’s original contract while the contract of suretyship is made at the same time and by the same instrument as the principal’s contract. The surety has a much more direct liability than the guarantor.

  • TABLE MORTGAGE

A loan that is paid back by making regular payments of fixed amounts. Each payment pays back part of both the interest and the principal.

  • TERM

The length of a home loan or a specific portion within that loan.

  • TERM DEPOSIT

Called a fixed interest account.  Money deposited for a fixed term – usually between 30 days and 5 years. If we want our money back before the term is up, we may have to forego a portion of our interest as a penalty.

  • TIME HORIZON

In investing, the period of time before we need our money back. This is particularly important when we’re choosing a mix of investments, to make sure the money will be there when we need it. Typical time horizons (also called ‘duration’) are 0–3 years (short term), 4–9 years (medium term), and 10 years or more (long term).

  • TITLE

A document that gives evidence of an individual’s ownership of property.

  • TITLE SEARCH

Process to ensure that the vendor has the right to sell and transfer ownership. The Title Search is usually performed by a Title company.

  • TRUSTEE COMPANY

Manages money through will preparation and trust and estate administration.

  • UNENCUMBERED

A property free of liabilities, encumbrances or restrictions.

  • UNDERWRITING

The decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.

  • UNIT

The measure of your ownership in the investments that your fund holds. You buy units by contributing to a given fund; you cancel the purchase when you withdraw money from that fund.

  • UNIT PRICE

The price of buying or selling a unit in an investment fund. The unit price moves up and down reflecting the value of the investments in the fund. Your balance is calculated by multiplying the number of units you have by the unit price on the day.

  • UNIT TRUSTS

A structure in use by many managed funds. Managed funds work by pooling money from a number of investors and then using this money to buy a variety of assets. In a unit trust, each investor owns a portion of the total fund.

  • UNSECURED LOAN

A loan which is not secured against any of the borrower’s assets. These are more risky for a lender than a secured loan. To compensate for this, the lender charges a higher interest rate.

  • VALUATION

A report as required by the lender, detailing a professional opinion of the property’s value.

  • VARIABLE INTEREST RATE

A rate that varies in accordance with the rates in the marketplace.

  • VENDOR

A party who offers a property for sale.

  • VERIFICATION OF EMPLOYMENT

A document signed by the borrower and employer verifying his/her position and salary.

  • VOLATILITY

The ups and downs in value that an asset can have. Often mistakenly used interchangeably with ‘risk’. Although the two are related, they are not the same. We might invest in a growth fund that has a lot of ups and downs (high volatility), but because we have a long time before we need our money (a long time horizon), there actually may be little chance (risk) of us not reaching our retirement goals.

Note: Please note these are generic definitions and do not replace the need for competent legal and accounting advice.

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