Home Loans - August 13th
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Home Loans - August 8th
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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. According to Statistics New Zealand’s Century of Cenuses report, released in mid-2015, the number of New Zealand households which own their property dropped to 64.8% by 2013, the lowest rate since 1951 when it was at 61.5%. 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 currently sitting on quite the asset!
In this current property climate, it is more important than ever to compare home loans,to ensure you get the best interest rate and most suitable 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 you ever commit to. So, it’s worth spending the time upfront to get it right! CANSTAR assesses 58 loans from 10 providers across New Zealand in its most recent Star Ratings, to help you compare home loans to find an outstanding-value loan to suit your needs. All these home loans are listed on our home loan comparison table, with interest rates, fees and features updated regularly.
A “home loan” or “mortgage” is a loan advanced 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.
Written by: TJ Ryan
There are a number of different types of home loans in New Zealand. Here are the home loans most commonly asked about:
A fixed rate home loan simply means that the interest rate is “fixed” for a certain amount of time – commonly 1, 2,3, 4 or 5 years. The fixed rates on home loans are historically low at present.
The main advantage of a fixed rate loan is that it gives you certainty of repayments over the fixed term; because the interest rate is guaranteed not to go up (or down) over the fixed period, it can be a way to budget your costs.
The main disadvantage of a fixed rate loan is the inflexibility: generally large additional payments cannot be made and you may face a “break fee” if you decide to sell before the end of the fixed term.
A floating rate loan means that the interest rate will rise and fall (vary) over the period of your home loan. This may be in response to movements in the official cash rate or may simply be 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 sell your property and move. Read about potential cost penalties with other forms of home loans.
The main 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.
An interest-only home loan is one where only the interest is paid, 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 on holding onto the property for a short while before selling it. Interest-only home loans may not be a good idea for standard home-buyers simply looking to pay less on their weekly repayments, because the smaller the amount of loan principal that is paid off, the more overall interest you may end up paying on your loan over the years.
Generally, an interest-only home loan will have a short time frame (between 1 – 5 years) before it reverts 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 the loan at any time, up to the agreed limit, and to pay money into the loan at any time. It is not generally a loan set up to purchase a property, but rather set up against the equity in an existing property.
CANSTAR’s most recent rating report researches, rates and compares 58 home loans, to provide home buyers with certainty and confidence when they compare mortgages. And, despite our currently low official cash rate, home loan interest rates can vary significantly between home loan providers.
Because home loans are a long-term debt, even small differences in interest rates can make a big difference to the total amount you will pay on your loan over its lifetime.
There are a number of fees that may apply to your home loan. Some of the common home loan fees are:
Account keeping fee: An account-keeping fee is a fee charged by lenders (often monthly) to help cover the administration cost of maintaining the loan. It may be called a “service fee”.
Annual fee: Some lenders may charge an annual fee rather than an ongoing account-keeping fee on certain mortgages. These may be a “package loan” where a number of deposit and credit accounts as well as your home loan are “packaged” up under one administrative cost.
Redraw fees: If your home loan has a redraw facility (an agreement whereby you are able to redraw some or all of any home loan payments in advance) there may be a fee associated with doing so.
Other ad-hoc fees may include a loan application fee and a valuation fee at the time of property purchase, a late payment fee if you miss a loan repayment and a discharge fee if you pay your home loan off early.
You should ask your lender to detail all fees that may apply to your home loan.
|Home Loan size at commencement||Monthly repayment at 5.5%||Total cost over 25 years at 5.5%|
This is a question that we are often asked at CANSTAR, however, it is a question that is impossible to answer definitively as it will depend on the size of your home loan, the term of your loan, the interest rate, the fees, whether you make any additional home loan repayments and how your interest rate fluctuates over time.
For purely illustrative purposes though, here is a basic example of indicative costs of a 25-year home loan at an interest rate of 5.50%.
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 the Home Loan Star Ratings Report.
Please note that these are a general explanation of the meaning 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. You cannot rely on these terms to the part of any policy you may purchase.
Annual Percentage Rate – This is the total charge for the loan including fees and interest expressed as a percentage, which allows you to compare across the market.
Application fee – A fee paid to the lender for setting up a home loan.
Appraisal fee – A fee charged for a professional opinion about how much a property is worth.
Arrangement Fee – A fee some lenders charge for arranging your loan.
Asset – An asset is 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 a one bank account into another account at a certain point in time to coincide with bills or payments.
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 – This is when someone’s debt problems get so serious, they are unable to pay their existing 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, but 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 borrow ends a fixed-rate loan contract before the fixed-rate period expires.
Bridging finance – A loan that can be used when buying a new home before selling an existing home, usually short-term.
Buydown – When the 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 individuals and corporations, based on their borrowing and repayment history.
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 house.
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 – These home loans allow a borrower to lock in an interest rate for a particular period of time, typically 1 – 5 years. The interest rate that the borrower pays will remain the same for that amount of time, regardless of changes in the Reserve Bank’s official cash rate.
Floating Rate Home Loan – A home loan on which the interest rate is not fixed (it floats) and can vary up and down, generally in line with changes in the official cash rate.
Foreclosure – When the homeowner defaults on the 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 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.
Whether it’s a house, a unit, a duplex or a penthouse, getting into your first home is exciting – and CANSTAR’s home loan updates are a great place to start learning about many of the financial things you’ll need to think about.
As a first home buyer, you need to be aware of what’s on offer with regards to government incentives and how they can benefit your cause. But be aware these schemes are subject to change.
As of June 2016, First Home Buyer grants in New Zealand include:
After 3 years of making contributions to KiwiSaver, you may be eligible to apply for a KiwiSaver HomeStart Grant of $3,000 to $5,000 for individuals and up to $10,000 for couples. The grant can effectively be doubled if you are building or purchasing a new home, or purchasing land on which to build a new home, so that the grant may be up to $10,000 for individuals and up to $20,000 for couples.
Eligible First Home Buyers can apply for the FirstHome Grant of 10% of the purchase price, up to $20,000, from Housing New Zealand. This grant was designed for people who have a modest income and can afford mortgage repayments, but have trouble saving for a deposit. The FirstHome Grant only applies to specific Housing New Zealand properties, and these are usually located in country or regional areas. However, it does not apply to high-demand renting regions: Auckland, Wellington City, Christchurch, Hamilton, and Tauranga.)
If you only have a 10% deposit, you can apply for a Welcome Home Loan. The loan is underwritten by Housing New Zealand and only offered by selected banks and lenders – The Co-operative Bank, Heartland Bank NZ, Kiwibank, NZCU Baywide, NZCU Employees, Nelson Building Society, SBS Bank, TSB Bank, and Westpac.
To be eligible to apply for this loan, you will need a minimum 10% deposit, and the price of the house you are buying must be less than the regional house price cap.
Housing New Zealand and Kiwibank have teamed up to provide the Kainga Whenua Loan for Maori individuals and Maori land trusts, to buy a one-storey house on piles (but not the land) located on multiple-owned Maori land.
Some useful articles for first home buyers are below.
As the size of your household expands, the size of your house may need to expand as well. Should you renovate the place you’re in, or sell and start again? Perhaps you could even keep the place you currently have, as an investment property, and buy somewhere else to live. There are plenty of things to think about, and some useful articles for upsizers are below.
Whether it’s to renovate, to free up equity for investment or simply to move to a better-value home loan, there are many reasons for refinancing. Some useful articles for those looking to refinance their home loan are below.
Property is a tax-favoured form of investment in New Zealand, and it’s popular! Some useful articles for property investors are below.
Sometimes it’s nice to start with a clean palette and create the home of your breams from scratch. Some useful articles for those building a home are below.
The following home loan providers are listed on CANSTAR’s home loan comparison tables:
New Zealand Home Loans
The Co-operative Bank