Co-author: Michelle Norton
Here’s what you need to know before you apply for a home loan.
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 property prices in New Zealand, a home loan is realistically the way by which the majority of people will afford 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 that people would know about are variable rate home loans or fixed rate home loans – but there are many more options than that. Check out the following options when considering what would best suit your home purchase:
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. Find out more about floating rate home loans here, or compare variable rate home loans on our website:
Fixed rate home loan
The fixed rates on home loans are reasonably low at present. A fixed rate loan simply means that the interest rate is “fixed” for a certain amount of time – commonly 1, 2,3, 4 or 5 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 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. Read about potential cost penalties here.
Compare fixed rate home loans on our website:
Split home loan
A split loan is simply a combination mortgage whereby part of your home loan is on a fixed rate and part is on a variable rate.
When choosing the type of loan that would suit, first home-buyers should consider how long they intend to stay in the home. If the intention is only for a short while, a variable loan is more flexible and doesn’t entail “break fees”. On the other hand, if the intention is to live in the home long term, a fixed rate may offer the certainty of repayments the borrower is looking for. Of course, a split loan can be a good option, providing both flexibility and security.
Interest-only home loan
An interest-only home loan is one where only the interest is paid, rather than both the interest and the principal. 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.
This type of loan can be useful for investors who can claim the interest as a tax deduction, or buyers who only plan on holding onto the property for a few years 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.
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’ve outlined 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.
Owner occupier home loan
Owner occupier home loans are designed for those who either own their own home already, or have an existing mortgage on their current home, but want to get a home loan to buy their next home or to renovate their existing home. Find out more or compare owner occupier home loans on our website.
Investment home loan
Property investment is very common in New Zealand. An investment loan is a type of home loan that someone takes out to buy an investment property. It is 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. There are many reasons why someone might do this, such as to get a lower interest rate with a different loan or a different lender, to sell one home and buy a different home, to enlarge their loan so that they can renovate, to downsize to a smaller home, for debt consolidation, or other reasons.
Find out more about refinancing your home loan here.
Irrespective of what type of loan you choose, make sure it’s good value! We can help you compare home loans using our database of home loans star ratings
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