Home loans involve a lot of money and can quickly become complicated. But, because your house is likely to be the most expensive thing you ever buy, it’s worth getting right.
Several mortgages are available in New Zealand, with different advantages and disadvantages depending on your goals. The first question to ask with your mortgage, which applies to all the types, is whether you want a loan to be fixed or variable?
What are fixed and variable loans?
Mortgage lenders will generally ask you to choose between one of the two. Fixed interest rates lock you and your provider into one agreed-upon term at a certain percentage. This means that even if the market fluctuates, you and your lender both have to stick to that agreement. Generally, you may see lenders advertise a year or two at a low-interest rate to get in first time home buyers, and the amount will later become variable.
A potential downside to all this is that you can’t pay more than the agreed amount at any time you like. That’s because your lender wants the security of you paying at the rate discussed, for the length of time decided on — that’s how they make their money. You could face some overpayment fees if you do not stick to your agreement.
Variable loans are the opposite of fixed, relying on the changing market interest rate. This gives you the flexibility to pay as you like and finish your mortgage sooner, but it may mean you end up paying more in the long run.
How to set a term.
Generally, this is between 10-30 years, with the potential to relook at your mortgage every five years. The longer-term you apply for, the more you stretch your loan and borrowing amount out. Stretching out your repayment period also makes it easier on you each payment day, as you’re dealing with smaller amounts of debt per month.
The downside is the interest, calculated per annum (year). So every year you add on to your repayments, more interest is added. But it also means a lower interest rate is charged because there’s less ‘risk’ with a longer payment term.
The math gets tricky here, so you’re going to want to work out what’s best for you with a mortgage calculator. Also, remember to focus on what you can afford per fortnight or month before taking on anything else.
You can think of this as being ‘all on the table’ — because your repayments are pretty upfront, and you can choose the term length for repayments. As you can select either fixed or variable, repayments are recalculated with changes in your interest rate.
Initially, you’ll be repaid on the interest you borrowed before paying back the principal (that’s the amount you’ve taken out to borrow, without added interest). As you begin repaying this principal amount, your interest decreases.
Table mortgages can take a while to pay off but are generally quite affordable and consistent.
How to reduce mortgages.
Unfortunately, these are pretty hard to secure because they involve high upfront costs. Interest rates start on the total amount and reduce as you repay the principle — which means you can be done much sooner.
Don’t worry if you can’t secure this straight away — high initial payments on the principal mean this loan type is usually set aside for experienced mortgage borrowers or those heading into retirement.
With this loan type, you pay only on the interest, over nightly/fortnightly amounts. The principal amount you borrow doesn’t enter into the equation yet. So it’s an option for first-time homeowners or property investors, who might lack the money upfront for a total loan but want to secure a property for the future.
Generally, you’d swap out an interest-only loan for something like a table mortgage later on when you’re in a better position to begin repaying on the principal.
Here, you’re linking your mortgage to your everyday and saving’s accounts to reduce your overall interest rate. Those with more credit options, like a card or multiple accounts, have more ability to offset their borrowed amount.
Offset mortgages are another great way to start your lending journey. Interest rates vary, though, so it can get more expensive than choosing a fixed rate.
Revolving credit mortgages.
Revolving gives you a fair bit of freedom, with a maximum borrowing amount and the ability to repay or withdraw as needed. Interest is then calculated on your daily balance and paid monthly.
The advantage of this type is also its most significant disadvantage — if you’re unable to make regular payments, something as flexible as a revolving mortgage can help. But making repayments this way also requires a commitment to put aside the money you need for each instalment, the risk being less of an obligation to pay when you can, which may increase your overall monthly costs.
Reverse mortgages are generally for people who don’t have the average income to repay on the mortgage due to retirement. Interest is added to the loan, which grows until the house is sold on, with the sale of the house will repay the final amount.
How to combine mortgages.
Of course, you may decide to change your mortgage type. Life changes, as does your financial situation. It’s really up to you what kind of risk you engage with, but typically you might begin with an offset or interest-only loan before branching out. Table loans are also pretty good for getting you started and keeping to a fixed steady rate.
When you change, though, you will face renegotiating the terms of your mortgage, which may cost you an additional account or other fees upfront. So make sure you calculate the total savings you could get based on how long you have left your mortgage versus the likelihood of changing interest rate.
Ultimately though, there is no one answer. The other thing you’ll have to keep in mind is the size of your savings, potential assets and your credit score. We talk about these elsewhere, but all of this information will make up how they evaluate you, whether you get approved, and the exact interest rate/loan term offered to you.
So, the better credit you have to begin with, the better loan you can secure yourself. But nothing is ever quite that simple (unfortunately).
There’s a lot of ground to cover in choosing mortgages. Two main types of interest come into play, which will be decided on your mortgage type — fixed and variable. Interest can be set for a time and become variable later — usually, they’re fixed to help you out in the first few years.
Mortgage types include;
- Revolving credit and
You can take out a combination of these types, depending on where you’re at in life - although you will have to renegotiate and potentially pay more in fees.