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Types of Mortgages
Table loans
Your regular repayments are the same each week, fortnight or month, unless your interest rate changes.
Every repayment includes a combination of interest and principal. At first, your repayments are made up mostly of interest, but as the amount you still owe begins to decrease, your regular repayment will include less interest and more principal (the amount you borrowed). Most of your later home loan repayments go towards paying back the principal.
Offsetting loans
Offsetting loans, such as TotalMoney, can reduce the amount of interest you pay. They do this by letting you subtract, or offset, for the purposes of calculating interest, your TotalMoney everyday account balances from the amount you still owe on your loan. This type of home loan has a floating (or variable) interest rate.
Revolving home loans
A revolving home loan, such as Rapid Repay, is sometimes called a “line of credit” or “revolving credit mortgage”. The idea is to help save on interest by reducing your daily loan balance as much as possible.
You can do this by direct crediting all your income into the account and then paying your bills and everyday expenses from the account as you need to. Revolving home loans have a floating (or variable) interest rate.
Interest-only loans
An interest-only home loan can be ideal when you need a home loan, but don’t want to pay off the principal (the original amount you borrowed) just yet. They’re often used for property investment. Some people take an interest-only loan for a year or two and then switch to a table loan.
Am I eligible for a New Zealand mortgage?
The amount you can borrow for a home depends on a couple of things: how much you can afford to repay on your current income, and how much a lender will lend on a property.
Lenders want to be sure that you’ll be able to keep up with your repayments and still have enough money left over to live on. They don’t all use the same method to work this out, however.
What is a mortgage?
A mortgage is the name given to a loan that is used to buy a property or piece of land where the loan is secured against the property being purchased. Mortgages are typically long-term loans with repayments spread over 25 years.
New Zealand Fixed rate mortgages
A fixed rate mortgage typically comes with an initial deal period, usually between two and five years (but can be longer; there are an increasing number of 10-year fixed rate mortgage deals available). The main advantage of this initial period is that you’ll know exactly what your monthly mortgage repayments will be for however long it lasts. This will enable you to plan your budget effectively, as you’ll know exactly how much you need to ring-fence for your mortgage repayments each month.
It’s worth pointing out that fixed rate mortgages tend to come with higher rates than their variable counterparts, but this is often a small price to pay for the security that fixed mortgage interest rates can offer.
How do you want to pay for your mortgage?
When deciding how to pay for your mortgage, you generally have one of two options – you can apply for an interest-only deal or opt for full repayment.
How long should my mortgage term be?
- The shorter your mortgage term is, the cheaper your mortgage will be for the entire term because you’ll pay less interest overall.
- Longer mortgage terms often mean lower monthly repayments, but could cost you more over the length of the mortgage.
Ideally, you should aim to set your mortgage term for as short a period as possible, as that way you won’t pay as much interest – although it does mean higher monthly payments. Conversely, a longer-term mortgage will reduce the monthly payments, but means you pay more overall, as interest will be charged for a longer period.
It’s important to weigh up your options carefully, as your decision will often be based on your current financial situation. However, it could be possible to change your term when it’s time to remortgage, so even if you want to keep your repayments low for the foreseeable future, you could opt for a shorter term when your financial situation changes. Remember, too, that if you find you can pay more, you may be able to make overpayments that can reduce your mortgage term.
Repayment mortgages
Repayment mortgages are designed so that, by the end of the mortgage term – which can range from 25-35 years and beyond – you’ll have paid off the full balance plus interest and will have nothing further to pay. Your repayments will be calculated accordingly, and while they’ll be higher than if you had an interest-only deal, you can be confident that you’ll have paid off everything by the end of the term.
Applying for a joint mortgage in New Zealand
You can apply for any of the above mortgages as a couple or group of friends (although not all providers will allow more than two people to apply together). If you do decide to do this, bear in mind that you will share the responsibility of making repayments, which means that if your mortgage partner becomes unable or unwilling to pay, you’ll be liable.
How to become a landlord in New Zealand
Buy-to-let (BTL) mortgages are a specialist type of mortgage for those who are or want to be landlords. They have much stricter lending criteria and require even more upfront research than a normal mortgage would warrant, which is why it’s best to seek independent financial advice before choosing to become a landlord.
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