Property and property ownership is always a hot topic in New Zealand. Buying a property, though, usually means taking out a home loan. In this article, we explain what a home loan is, and the different types of home loans available to Kiwi house buyers.
What is a home loan?
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 high property prices, a home loan is the only affordable way for most people to buy a house.
Types of home loan
There are a number of different types of home loans in New Zealand. Home loans are commonly classified either by interest rate type, or by purpose. We discuss both of these options below in more detail.
Types of home loan by interest type
The most common types of home loans are variable rate home loans and fixed rate home loans – but there are more options:
Floating rate home loan
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 break fee because there is no fixed term for you to break, so you can sell your property and move without the extra fees and charges that would apply to a fixed rate home loan.
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. Also floating rates tend to be higher than fixed rates.
Fixed rate home loan
A fixed rate loan simply means that the interest rate is “fixed” for a certain amount of time – commonly between one and five years.
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 help you budget your long-term finances.
The main disadvantage of a fixed rate loan is its 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. Read about break fees here.
Split home loan
A split home loan is a combination mortgage: one part on a fixed rate and the other on a variable rate. This gives you the freedom to make extra repayments and pay down the variable part of the loan more quickly, while still retaining the certainty of the cost of the repayments for the part on a fixed rate.
Interest-only home loan
An interest-only home loan requires you to only pay the interest charges on the mortgage, and no money towards reducing the principal loan amount. Generally, an interest-only home loan has a short time frame (between up to five years) before it reverts to a principal and interest loan.
This type of loan can be useful for investors who plan to sell the home for capital gains, or buyers who only plan holding the property for a few years before selling it.
Interest-only home loans are not generally a good idea for standard home-buyers simply looking to pay less on their weekly repayments. This is because the loan amount never reduces, and the only equity you can grow in the home is through capital gains.
Line of credit home 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.
Types of home loan by purpose
There are many different reasons why someone would take out a home loan, and many different types of loans designed to meet those needs. We outline the different types of home loan by purpose below:
First home buyer home loan
First home buyer home loans are designed for those who are buying their first home. A first home buyer loan can fit into many different home loan category types – it could be variable or fixed rate, principal and interest or interest only, construction home loan, etc.
Find out more about first home buyer home loans here.
Owner-occupier home loan
Owner-occupier home loans are designed for those who either own their own home, or have an existing mortgage on their home, but want to get a home loan to buy their next home or to renovate their existing home.
Investment home loan
An investment loan is used to buy property as an an investment. It’s a mortgage solution for those who want to buy a property and rent it out to receive income from it, but can’t afford to buy the property without a loan. Be sure to consider the pros and cons of investing in property before making any investment decisions.
Refinancing home loan
Refinancing home loans are designed for those who have an existing mortgage and want to switch to a different mortgage product. There are many reasons why someone might do this, for example, for a lower interest rate, to move home, to renovate, for debt consolidation, or for funds to purchase a car or boat.
Find out more about refinancing your home loan here.
Irrespective of what type of loan you choose, make sure it’s good value! To start comparing home loans, click the button below:
About the author of this page
This report was written by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.