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Owning a house on a quarter-acre section is part of the Kiwi dream for many but, in recent years, the property climate has become increasingly challenging for those attempting to enter the market. Auckland’s housing supply shortage has further intensified the issue, posing new challenges for first-home buyers, who are looking to First Home Buyer grants to enter the market. Of course, with all this demand on housing, those already in the market are sitting on quite an asset!
In the current property climate, it’s more important than ever to compare home loans, to ensure you get the best interest rate and home loan to suit your needs. Buying property – whether a unit or a house – is likely to be one of the biggest financial commitments you’ll make, and it requires a great deal of planning.
Your home loan is also likely to be one of the largest debts to which you’ll ever commit. So, it’s worth spending the time upfront to get it right!
Canstar assesses 308 home loans from 11 providers across New Zealand in its most recent Star Ratings. These ratings will help you compare home loans to find a great value loan to suit your needs. All the rated home loans are listed on our comparison table, along with interest rates, fees and features.
A home loan or “mortgage” is a loan given to you by a financial institution, in return for security over the property you are using the loan to buy. Typically, a home loan will be a 25 or 30 year term, with regular repayment amounts – fortnightly or monthly – that are designed to pay off the loan over the contracted term.
The loan is secured against your property so, if you are unable to continue paying the loan, the lender may ultimately require you to sell the property to settle the debt.
Given property prices in New Zealand, a home loan is realistically the way the majority of Kiwis will afford to buy a house. But it is important to compare home loans before jumping in the deep end.
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.