A mortgage is an agreement to lend and borrow money secured by real property. The borrower, that’s the mortgagee, pays the loan back to the lender, known as the mortgagor, in installments over a set period of time called the term. The mortgage secures the mortgagee’s legal obligation to repay the lending institution, typically a bank. Lending money incurs costs and no one lends you money for free. The bank makes a business out of these transactions by charging interest on the amount borrowed.
1. Mortgage Approval
To get a mortgage, you must meet a few requirements. Each lending institution or bank is different and has its own guidelines for lending. The bank will probe your credit history, income, employment situation and asset holdings to see if you are a good prospect.
The home or land you want to buy will also need to be up to a certain standard.
2. Mortgage Payments
Most New Zealand home loans have a mortgage term of between 15 and 30 years. The repayments are divided into equal monthly amounts over the term, called a fixed rate. A portion of the monthly amount goes towards paying back the principal, the amount you borrowed, while the difference pays the interest charged by the lender. Your monthly payments stay the same amount for the whole term but, with each payment, the interest portion decreases and the balance paid off the principal increases. This process is called ‘amortisation’.
The bigger deposit and instalments you pay, the less interest you’ll end up paying the bank over time. Don’t leave yourself short of funds to cover living expenses and costs of owning a property though. Remember, putting any unexpected windfall that comes your way into paying off your mortgage can be your most effective way of saving.
3. Mortgage Plans
There are lots of mortgage plans on offer at various banks and lending institutions. Other types of mortgage structures available include options for paying the interest portion only off your loan for a period before you start paying off the principal. You need to find the plan that suits you best and not get talked into the one that favours the bank. As an independent home loan specialist, TMMI can give you advice based on your unique financial situation, assess your eligibility and prepare your application to perfectly meet the requirements of the bank that we believe offers the best plan for you.
4. Closing Costs/Fees
Aside from the bank charging interest over time, there will be other expenses known as ‘closing costs’ or ‘settlement costs’ incurred to complete a real estate transaction.
You must take these into account and have funds at hand to pay them in full on settlement day or include these additional costs in the amount you borrow.
Getting advice from a mortgage adviser is not an additional cost on top of the sale price of the property. TMMI offers free mortgage advice to residential home buyers.
5. Mortgage Rates
These are the interest rates the banks charge you for borrowing money. They are tied to the Official Cash Rate (OCR) and can change often, even several times in one day. However, your mortgage plan will typically tie your payments to a rate that is fixed for a few months or years, making it easy for you to budget. Some plans will offer the option of having a portion of your payments on a floating rate that simply means the repayments on that portion could rise or fall if the lender changes their rate. This is an advantage only if rates are low or dropping. Lower interest rates are good! As of November 2017, rates in New Zealand are currently hovering around 5% and slightly lower but, in the past, they have reached as high as 19%, which is exceptionally high. Right now is an excellent time to get your first home mortgage since the interest rates are the lowest they have been for many years.
6. Getting A Deposit Together
To buy a home these days, it is recommended you have at least 20% of the purchase price saved up – but we might still be able to help you even if you don’t. If the home you want is for sale at $350,000 that means you should have a whopping $70,000 at hand for a deposit before the bank will come to the party with the remaining $280,000 plus settlement costs. As a first home buyer, you can access your Kiwisaver account to pay the deposit and TMMI can show you how to apply.