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A home loan or mortgage is a loan from a bank or other financial institution to buy, build, refinance, or renovate a residential property. In New Zealand, a home loan typically has a 25-year or 30-year loan term, is repaid via regular payments and accrues interest. Interest is what a lender charges to let you borrow money, written as a percentage of the home loan amount.
There are a number of different types of home loans or mortgages available in New Zealand, and the type best-suited to you will depend largely on your personal circumstances and preferences, including why you are taking out a home loan.
Here is an explanation of some of the most common types of home loans you are likely to encounter. A single loan can potentially be a combination of two or three of these, based on its interest rate type, repayment type and loan purpose.
A fixed rate home loan allows a borrower to lock in an interest rate for a particular period of time, typically from one year up to five years. The interest rate that the borrower pays will remain the same for that amount of time, regardless of any rises or falls in the OCR or the lender’s variable rates.
The home loan rate will then normally revert to variable, unless the lender and borrower agree to roll it over for another fixed term.
A variable home loan interest rate can fluctuate according to the lender’s wishes, although banks are often influenced by economic factors such as the official cash rate set by the Reserve Bank of New Zealand.
The rate can go up or down over time, varying your repayments. These loans generally allow for greater flexibility and more features than fixed rate loans, though their interest rates can sometimes be higher as well.
A split home loan refers to when a customer pays a fixed rate on part of their home loan and a variable rate on the rest of it.
If a loan has principal and interest repayments, this means the borrower has to pay back the loan amount alongside the interest throughout the life of the loan.
An alternative to principal and interest, an interest-only home loan is where the borrower only has to pay back the interest on the loan for the first few years, before the loan reverts to principal and interest repayments.
This may suit some borrowers as it can lead to lower repayments in the short-term, but interest-only loans tend to work out more expensive in the long run.
These are home loans where the borrower intends to live in the property rather than renting it out to make money. Interest rates on these mortgages tend to be slightly cheaper than on investor loans.
Owner-occupier loans can be further broken down based on the borrower’s intentions, including whether they are taking out the loan to buy their first home, to buy another home, to build a home on vacant land or to refinance an existing home loan.
These differences can affect the products or rates you can access in some cases. For example, you may be eligible for certain discounts or special offers if you are a first home buyer.
These are loans for property investors who plan to rent or sell the property they’re buying for a profit rather than living in it.
Both owner-occupier and investor home loans can be fixed, variable or split, and may offer principal and interest or interest-only repayments, depending on the specific lender and loan.
Regardless of which type of home loan you choose, it’s important to bear in mind that a home loan is almost always secured against your property, so if you are unable to continue paying the loan, the lender may ultimately be able to evict you from the property and sell it to settle the debt.
If you have another person act as a guarantor for your home loan, that person may also have to pay back the debt if you can’t meet your repayments.
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If you’re considering taking out a home loan, you may have some questions you’d like answered. Here are some common queries people search for when researching home loans, complete with links to articles containing further information.
Generally speaking, the process of obtaining a home loan involves comparing your options, working out how much you can afford to borrow for the property you want to buy, and then applying for a specific home loan – either directly to the lender of your choice or, indirectly, via a mortgage broker.
If the lender approves your application and agrees to lend you the money you requested, it will offer this money to you in the form of a home loan. You will then need to pay back the loan over time, in line with the lender’s terms and conditions.
The amount of money you are able to borrow for a home loan will depend on your personal financial circumstances, as well as the loan provider you choose and its lending policies.
You may be able to borrow more or less money depending on the lender’s assessment of your circumstances, which could include your credit score.
As a general rule of thumb, it’s often worth saving up a deposit of at least 20% of the value of the property you want to buy.
Lenders may also refer to this as a maximum loan-to-value ratio (LVR) of 80%, with your deposit being the other 20%.
Another advantage of saving up as big a deposit as you can is that it can reduce the total cost of your home loan, as interest is only charged on the money you borrow.
A fixed rate home loan is one that has an interest rate that is locked in place, or fixed, for a set period.
A variable rate home loan is one that has an interest rate that can fluctuate, depending on the market conditions and the decisions of your lender.
An interest rate is the proportion of the outstanding home loan amount that you have to pay as a fee for borrowing the money each year. A common practice is for lenders to spread out the interest you pay throughout the full term of the loan.
Canstar has a free mortgage repayment calculator that allows you to work out how much interest you might have to pay on a home loan, based on the amount you borrow and your interest rate.
Bear in mind that our calculator doesn’t include the costs of any upfront or ongoing fees and, for simplicity’s sake, it assumes your interest rate remains the same throughout the full term of the loan.
The process for refinancing a home loan is similar to applying for a new home loan. As a borrower, you have the choice of which home loan to apply for, and from which lender. You don’t have to stick with the same lender who issued your original loan.
If you do decide to switch lenders, you will have to go through a new mortgage application process, which involves paperwork and, often, application fees and charges.
However, the extra hassle and expense of switching lenders can prove financially worthwhile if you can secure a home loan with a lower interest rate.
The decision whether or not to fix your home loan is a personal one, and should be considered carefully in light of your financial needs.
For example, if you think variable interest rates will rise in the near future, getting a good deal on a fixed rate could be one way to lock in a rate you’re happy with for a few years.
On the other hand, if interest rates fall in the short term, locking in for an extended period could mean you miss out on the chance to secure a lower rate and interest repayment savings.
Of course, accurately predicting financial markets is impossible. So, to hedge your bets, you are often able to split mortgages into sums at different terms and rates.
A break cost, or break fee, is the charge some lenders apply to people who want to end their fixed-rate home loans before the end of the fixed-rate terms in their contracts. The fee is designed to compensate the financial institution for any loss of profit it faces as a result of a customer breaking the terms of the contract, including for administration and its own wholesale borrowing costs. It does not typically apply to other types of loans, such as variable-rate loans.
However, it’s worth noting that many lenders will be happy to refinance a home loan without charging a break cost if you are refinancing your loan to one with a higher rate.
The length of time it takes for a lender to approve or reject a home loan application varies, depending on factors such as the particular lender and the mortgage applicant’s financial situation.
In some cases, obtaining home loan pre-approval, or conditional approval, can speed up the time it takes a lender to assess a formal mortgage application.
Home loan pre-approval, also known as conditional approval, is the initial approval process when a bank provides a borrower with an estimate of how much they can borrow, based on the financial information they have provided.
Pre-approval does not necessarily mean the bank will approve the borrower’s formal home loan application, but it can, nonetheless, provide a borrower more confidence when working out how much they can realistically afford to spend on a property.
Lenders mortgage insurance is a type of insurance that a lender takes out to protect itself in case of default from a borrower, but which the borrower must pay for.
It usually applies to home loans with a high LVR (more than 80%), when the borrower has a deposit of less than 20% of the property’s value.
LMI is charged as either a one-off sum, which is usually added to the sum borrowed, or as a premium interest rate, charged until the home owner’s equity in their property reaches 20%.
The loan-to-value ratio (LVR) of a home loan is the amount borrowed as a proportion of the lender’s valuation of the property’s worth.
For example, a bank may approve your loan for 80% of a property’s value – an LVR of 80% – in which case you will need to pay the remaining 20% as your deposit. Many lenders’ best mortgage rates are reserved for borrowers with low LVRs.
A credit rating, or credit score, is an assessment of the creditworthiness of an individual borrower, based on their borrowing and repayment history (as shown on their credit report).
Lenders consider your credit rating when deciding whether or not to give you a loan, how much to lend you, and what interest rate you will pay.
Equity is the difference between the value of your property and the outstanding balance of the loan that was used to fund it. For example, if an owner purchases a house valued at $400,000 and pays the loan down by $100,000, they have equity in the property of $100,000.
Equity can, potentially, be negative. Negative equity occurs when a property’s value falls below the balance of its outstanding mortgage.
Property investors often use positive equity in the properties they own to access additional investment home loans.
The First Home Loan, supported by Kāinga Ora, supports FHBs who only have enough for a 5% home deposit, making it easier to get into a home with a low deposit.
Originally, the First Home Loan was only available for houses priced under strict regional price caps. However, in the 2022 Budget the price caps were removed. So, with a First Home Loan, it’s now even easier to secure a loan for a home with a deposit of just 5%.
Here are the key criteria for First Home Loan eligibility:
The First Home Grant and First Home Loan are both offered through Kāinga Ora, but they are not the same thing, although they can be used together.
The First Home grant is available to FHBs who have been contributing at least the minimum amount to KiwiSaver for three years or more. It providers eligible FHBs with:
You receive $1000 for each year you have been a KiwiSaver member, up to a total of five years. This means you could get $3000, $4000, or $5000 to put towards a deposit. If you’re buying a new build the grant doubles to $2000 per year.
Note: regional price caps still apply for homes available to purchase under the First Home Grant scheme. However, some of the caps were raised in the 2022 Budget. You can get more details from the Kāinga Ora website here.
While certainly not the norm, you may be able to secure a loan of 100% of the purchase price of a home through some lenders if you can meet certain strict conditions, such as having a guarantor on the loan. Such loans are usually determined on a case-by-case basis by the lender.
That said, it’s not common for lenders to offer home loans to borrowers with no deposit.
If someone acts as a guarantor for your loan, it means that they promise, or guarantee, to be legally liable for the loan if repayments are not made.
As such, when applying for the loan, the guarantor must also demonstrate their capacity to repay the loan.
Negative gearing is when the income (such as rent) that an investor makes from an investment property is less than the interest and fees on the home loan and the maintenance costs for the property. However, some costs associated with property investment are available as a tax deduction against an investor’s income.
A mortgage or home loan offset account is a savings account, or accounts, linked to your home loan to reduce the interest charged on the loan. The money (or credit) in the account(s) is offset daily against the loan balance, which reduces the daily mortgage interest charges.
A home loan redraw facility is a feature that enables a borrower to withdraw funds they have already paid. Usually, this is conditional on the mortgage holder being ahead on their loan repayments. A redraw facility is not available on all loans.
A mortgage broker is a type of financial professional who specialises in helping their clients to find a home loan. Their job is to gather information about the needs of their clients and to suggest lenders and products that match those needs. Once they have helped their client to select a home loan, a mortgage broker may also assist the home buyer with the application process.
A construction home loan is a type of mortgage designed for people who are building a home or doing major renovations, as opposed to buying an established property. It has a different loan structure to home loans designed for people buying existing homes.
A bridging loan is a special type of short-term loan designed to cover the cost of a second property and to give the purchaser time to sell their existing home, even if they already have a mortgage. It essentially creates a financial bridge, allowing homeowners to traverse the gap between buying and selling.
There is a choice of different mortgages available in NZ. Here are the four most commonly used by Kiwis to purchase a property:
A fixed-rate home loan has an interest rate that is set for a certain amount of time – commonly 1, 2, 3, 4 or 5 years. Current fixed-rates are at historic lows.
The main advantage of a fixed-rate loan is that it gives you certainty of repayments over the fixed term. This is because the interest rate is guaranteed not to change.
The main disadvantage of a fixed rate loan is the inflexibility: generally large additional payments cannot be made. You’ll probably also face a break fee if you decide to switch mortgages or lenders before the end of the fixed term.
A floating-rate loan means that the interest rate will rise and fall over the period of your home loan. This may be in response to movements in the Official Cash Rate, or due to a business decision by your financial institution.
The main advantage of a floating-rate loan is flexibility. While you must meet your minimum monthly repayment, you can usually pay more if you want to. There is also no cost penalty if you decide to switch mortgages or lenders.
A disadvantage of a floating rate loan is that your minimum repayment amount may rise or fall at any time. If you are on a tight budget, this could be a real problem for you. Floating rates are also usually higher than fixed rates.
Only the interest is paid on an interest-only home loan, rather than both the interest and the principle. This type of loan can be useful for some investors, who can claim the interest as a tax deduction, or buyers who only plan holding the property for a short time before selling it.
Interest-only home loans are not recommended for standard owner-occupiers, due to the increased long-term interest costs associated with not paying off the loan principal (the original loan amount).
Generally, interest-only home loans have a short time frame (up to five years) before they revert to a principal and interest loan.
A line of credit is a loan borrowed against the equity in your home. It gives you the ability and flexibility to access a portion of the loan at any time, up to the agreed limit, and is similar to an overdraft in this way. Essentially, you can take money out that you’ve already put in, for other purposes. You can also pay money into the loan at any time which means you can pay off your mortgage faster, if you wish. It is not generally a loan set up to purchase a property, but rather set up against the equity in an existing property.
There are many different features that may be attached to your home loan. These can include:
A summary of features that we look for in an outstanding value home loan are contained in the Methodology attached to our latest Home Loan Star Ratings Report.
Whether you’re buying a house, a unit, a duplex or a penthouse, Canstar’s home loan updates are a great place to keep up-to-date and informed about everything that’s happening in the real estate market.
Canstar’s most recent rating report researches, rates and compares over 100 home loans, to provide home buyers with certainty and confidence when they compare mortgages.
For although home loan interest rates are at historically low levels, they can still vary considerably between products and lenders.
Home loans are a long-term debt, so even small differences in interest rates can make a big difference to the total amount paid on a loan over its lifetime.
Fees associated home loans can include:
Account keeping fee: Charged by lenders (often monthly) to help cover the administration costs of maintaining the loan. Sometimes called a service fee.
Annual fee: Some lenders charge an annual fee rather than an ongoing account-keeping fee on certain mortgages. Annual fees are usually charged when a loan is packaged with other banking products, such as a savings account and credit card.
Redraw fees: If your home loan has a redraw facility (when you can draw out some or all of your previous mortgage repayments) sometimes there are extra associated fees.
Other fees include:
You should ask your lender to detail all the fees that could apply to your home loan.
Please note: these are general explanations of terms used in relation to home loans/mortgages.
Policy wording may use different terms and you should read the terms and conditions of the relevant policy to understand the inclusions and exclusions of that policy.
Annual percentage rate – total charge for the loan including fees and interest expressed as a percentage, which allows you to compare across the market.
Application fee – Fee paid to the lender for setting up a home loan.
Appraisal fee – Fee charged for a professional opinion about how much a property is worth.
Arrangement Fee – Fee some lenders charge for arranging your loan.
Asset – A resource controlled by the entity as a result of past events or transactions and from which future economic benefits are expected to flow to the entity.
Automatic transfer – a system that is set up to automatically transfer money from one bank account into another.
Balloon loan (balloon mortgage) – A loan that has regular payments that do not cover the full loan by the end of the term, meaning a larger lump sum is due at maturity.
Bankruptcy – When someone’s debt problems get so serious, they are unable to pay their debts and bills. When this happens, it’s possible to apply to a court to be made bankrupt – which means that any assets you have, such as savings, will be used to pay off your debts. Normally, after one year, a person will be discharged from bankruptcy. However, it will still have a negative impact on their credit rating, and may stop them getting credit in the future.
Basis points – A basis point is equal to 0.01% interest. For example: 50 basis points is an interest rate of 0.50%.
Bill of sale – A written agreement whereby ownership is transferred, but the original owner is allowed to retain possession.
Biweekly mortgage – A home loan in which the payments are scheduled for every other week, rather than each month.
Break costs – The penalty fees charged when a borrower ends a fixed-rate loan contract before the fixed-rate period expires.
Bridging finance – A short-term loan used when buying a new home before selling an existing home.
Buydown – When a home buyer “buys down” the interest rate by paying an initial fee upfront, thereby reducing the size of future payments.
Caveat emptor – Latin for “let the buyer beware”.
Countersigned – Additional signature or signatures to guarantee the validity of a document.
Credit rating – An assessment of the credit-worthiness of an individual or corporation, based on their borrowing and repayment histories.
Credit report – A report from an authorised agency that shows the potential borrower’s credit history. Lenders access the information in your file to help them decide whether to lend to you. They can also record a default on your file if you make loan repayments late, or don’t pay a utility bill. Every time you make an application for finance, an entry is recorded on your file, showing the lender you applied to, the type of finance, the amount and the date.
Credit/facility limit – The maximum loan amount that a borrower can borrow under their home loan contract.
Current rate – The rate advertised by institutions not including fees, discounts and special offers.
Debt consolidation (consolidation loan) – A loan that replaces multiple loans with a single one, often with a lower monthly payment but a longer period of repayment.
Default – When a consumer fails to fulfil obligations to make the necessary payments on a loan.
Deposit guarantee – A substitute for a cash deposit to assist with the purchase of a property. Useful when the buyer has cash tied up in term deposits or shares, but the buyer is still required to pay the full purchase price at settlement.
Disbursements – The various costs your solicitor or conveyancer has to pay to other organisations and bodies on your behalf. For example, search fees and stamp duty/ land tax. Your solicitor or conveyancer will itemise the disbursements on the invoice they send you.
Down payment – The initial payment of the home loan, usually a small proportion of the total price.
Drawdown rate – The date on which the borrower first uses the loaned money.
Empty nester – Someone whose children have moved out of their house. They are typically in the market for a smaller home.
Encumbrance – An outstanding liability or charge on a property.
Equity – The residual claim to ownership which the purchaser holds. For example, if a house is valued at $200,000 and the owner has a loan of $120,000 against the property, the equity in the property is $80,000.
Extra repayments – Some home loans allow you to make extra payments earlier/greater than the required amount.
Fixed rate home loan – A loan with a fixed rate of interest, usually for one to five years.
Floating rate home loan – A loan on which the interest rate can go up and down, generally in line with changes to the Official Cash Rate.
Foreclosure – When a homeowner defaults on their mortgage and has their interest in the property cut off. Usually leads to a forced sale of the home, with the proceeds going towards the mortgage debt.
Guarantee – Any undertaking which promises to pay an amount of funds upon the presentation of a claim or some other defined event (usually a financial default on the part of the entity for which the guarantee was issued).
Guarantor – A person or company that endorses an agreement to guarantee that promises made by the first party (the borrower) to the second party (lender) will be fulfilled, and assumes liability if the borrower fails to fulfil them (defaults). In case of a default, the guarantor must compensate the lender, and usually acquires an immediate right of action against the borrower for payments made under the guarantee.