What is a Mortgage? A mortgage is a loan from a lender to help you complete the purchase of a property. The lender will use the property as an asset for security. You get charged for this home loan through an interest rate.
Mortgages are a topic smothering headlines across the world and in NZ we’re an economy dominated heavily by the property market. This is steadily changing and diversifying as our population grows and our investments change – for example, bringing in KiwiSaver and removing the inaccessibility to the share market through platforms like Sharesies and Hatch. Property continues to be the preferred way kiwis want to create wealth for the future.
What are the different types of Mortgages in NZ?
Table loan is the most common type of home loan, and typically you can choose up to 30 years with most lenders. With a table loan, it means the early repayments you make are usually interest only (which is why an interest rate is so important). Towards the end of the loan, you’re paying back the principal (the initial amount borrowed).
Revolving credit loans are essentially a giant overdraft and require a lot of self-discipline and organisation. This is where your pay would go in, bills are paid out when they’re due, and you keep the loan as low as possible. Typically for these loans you pay less interest as lenders calculate the interest daily. This type of loan allows lump-sum repayments, which is great if you have come into a lump sum of money.
Offset loans can ultimately reduce the amount of interest you pay, as you can link your loan to any savings or everyday accounts you already have. You take your mortgage, less your savings, and have what you need to pay interest on. Our example here would be if someone with a $100,000 mortgage and $20,000 in savings would only need to pay interest on $80,000.
Interest only loans are where you pay for the interest-only part of the repayments, not the principal i.e. the rest of the loan. This option works great for a couple of years, and is super helpful if you are on a single income or have an investment property. However by having the loan on interest only you will pay more in repayments long term.
What is a loan structure, and what are the benefits of each type?
Every borrower comes with their own unique set of circumstances, so every borrower needs a unique loan. Here are a few loan features that you should consider:
Fixed rate
The interest rate on your loan is fixed, meaning it can’t go up or down, usually for a period of one, two, three, four or five years.
Pros
- Repayments are the same amount every month.
- Lenders often offer lower rates.
- You’re protected if market interest rates are rising.
Cons
- Fixed rate loans may come with repayment limits of fees for making extra repayments.
- If interest rates fall, you may find yourself overpaying.
- Lenders sometimes charge break fees if you sell the property and discharge the loan before the fixed term ends.
Floating or variable rate
The interest rate on your loan can go up or down depending on what the market is doing.
Pros
- You have more freedom to make extra repayments, repay your loan early or change your loan without incurring fees or penalties.
- You may be able to consolidate debt into a floating rate loan.
Cons
- If market interest rates go up, so will yours.
- Floating rates are usually slightly higher.
Offset account
Usually, you have to pay interest on the full amount of your loan – the principal. But if you link a savings or everyday account to your loan, you pay interest on the principal minus whatever is in your linked or offset account.
Pros
- You may pay less interest which might enable you to pay your loan off faster.
Cons
- You won’t receive interest payments on the amount in your savings account.
Redraw facility
This is also referred to as Revolving credit facility. This turns your home loan into something like a giant credit card. Your pay goes into the account, all of your expenses come out and you can spend up to a certain limit. Interest is calculated on the balance throughout the life of the loan, so getting paid into the account should reduce the total amount of interest you pay. You can make lump sum repayments and reduce your credit limit to help pay the loan off faster.
Pros
- If you’re disciplined with your money, you may be able to pay your mortgage off faster
- Putting extra funds into this account will reduce the amount of interest you pay.
Cons
- If you’re not disciplined, it’s easy to overspend with a redraw facility, which could make paying your loan off difficult.
Depending on your situation and what your goals are, you might need a loan with one or all of these features in any number of combinations (or other features that we haven’t mentioned here).
How to manage your mortgage?
It always starts with a budget. We promise, budgeting provides you with more knowledge than restriction, and even though a lot of people prefer to stick their head in the sand, you’ll find empowerment when you have financial freedom. We’ve pulled together a few handy tips on how to best manage your mortgage.
When you have an asset as large as a house, staying on top of what goes into the account and what goes out will make the biggest difference. It’s not just the mortgage you’re paying off, it’s rates, any insurances, and expenses on top of that.
Can you negotiate an interest rate on an existing mortgage?
Absolutely! We always recommend you go to a financial adviser as they will do most of the legwork for you and ensure you get the best rate for you that suits your lifestyle. Mortgage interest rates are subject to change as and when the banks or other lenders feel they want to, so if you see something sharp, or are wanting to make a shift in your lifestyle, reach out to someone who knows where the best options are for you. As New Zealand is a strong housing market economy, banks are aggressively competitive when it comes to rates, rate prices, and making sure they get your business using incentives like cashbacks.
This doesn’t include the additional diversity of a second-tier lender either, which are growing in popularity for mortgages and home loans. Second-tier lenders are great for people that are self-employed, as they will have different criteria applied to people who are PAYE employees (as in paid on a schedule).
How to find a good deal on your mortgage?
Go to a financial adviser, they’ll have the widest range of understanding and knowledge across all lenders and deal with a number of them every day. You are under no obligation to go with the bank you have for your day to day spending.
It’s always worth shopping around and seeing what else is available for you, however this is a time consuming task!
How much can I borrow against my house?
These lending rules and criteria change often. If this is a home you live in (you are what is called ‘owner occupied’) you can borrow up to 80% LVR.
As we said in our First Home Buyer Survival Guide, an LVR is the amount of your loan compared to the value of your property. This is designed so you can have the best opportunity to afford your mortgage repayments, and if you can’t, the bank can sell your house and have mitigated any shift of total sale value from when you purchased to when you sell.
Naturally it also depends on what you’re buying from, from an investment property or a rental, to taking out a loan to get those much needed reno’s done.
The Debt-to-Income ratios introduced on the 1st July mean you can borrow no more than six times your household income if you are purchasing an owner occupied property or a maximum of seven times your household income if you are purchasing an investment property. However, the banks do still take into account your actual income and expenses so the process can get quite complex. Speaking with an Adviser is recommended to get the best result possible.
What is a mortgage broker, and how can they help you?
A mortgage broker will look at your financial situation, provide recommendations, advice on how to attain and structure your mortgage to best suit your needs. Mortgage brokers are a middle-man between you and a bank or a mortgage lender with expert knowledge to make sure you get the best deal. Mortgage brokers also do a lot of the heavy lifting for you through managing the application, timelines and negotiating interest rates on your behalf.
All information in this blog is provided as guidance and should not be taken as personalised advice. If you have any questions, please reach out to a financial adviser to get information and financial advice tailored to you.
