Understanding your mortgage

man reading a book

There's a lot to take in

Sorting out the financial stuff is different for everyone and our advisers will help you find the right solution, but here’s some useful information if you fancy a bit of background reading:

Different types of mortgages

Getting your mortgage structured correctly is one of the most important pieces of the home buying process. Getting it wrong can cost you thousands over the term of your loan. Luckily, this is what our advisers are great at. We’ll take your lifestyle into account and figure out what’s going to work out best for you.

We’ll explain it all to you, but if you want to get ahead on some of the jargon, here’s a quick breakdown.

Fixed Rate Mortgage

Fixed rate mortgages give you certainty; you’ll know what your repayment amount is for a fixed term of between 6 months and up to 10 years with some lenders. Even if interest rates go up or down you pay the same, so you could miss out on savings, or avoid paying increases. If you repay a fixed rate early (like if you sell the house) you may end up having to pay early repayment fees.

Floating Mortgage

Floating rate mortgages give you more flexibility to pay your loan off faster. The rate can go up and down at any time but this movement is closely tied to the official cash rate. With a floating mortgage you can pay it off as fast as you like without fees and some banks let you redraw funds if you have repaid more than their minimum requirement.

Revolving Credit

This is essentially a giant overdraft on your transaction account where the overdraft is at floating mortgage rates. As long as you can resist the temptation of using all that credit for fun things like shoes and holidays, there are a couple of great benefits:

It’s better to throw all of your savings at the mortgage and have undrawn funds in a revolving credit which reduces your interest payable.
Gives you easy access to funds and can smooth your mortgage if your income is lumpy or irregular. Can be a great option for self-employed/contractors or if you’re planning a family.

Off-set Mortgage

An off-set mortgage gives you similar interest savings to a revolving credit, but rather than having to put your surplus funds in one pool lets you use up to 10 different savings accounts to off-set the balance on a floating loan linked to those accounts. This product is great if you like to keep separate accounts for different purposes such as holiday savings, renovation savings, new shoes savings.

Interest-Only Mortgage

Interest-only terms are available to customers in most instances, provided they have an equity position of 20-30% of their current property value, although some banks won’t allow interest-only payments on lending secured by the family home. The interest only-terms can vary depending on the lender to a maximum term of 5 years.

Capped mortgage

This mortgage type is generally way over complicated and not very common in New Zealand. Essentially you get a floating rate that is capped in the event that rates go up, but you pay a higher rate for that privilege.

More mortgage jargon

Maximum mortgage term

The maximum term for mortgages is generally 30 years. It can be set up on a reduced term as well if suitable (and we recommend this where possible).

Repayment frequency

Loan payments can be made weekly, fortnightly, or monthly (depending on the bank) but from our experience it’s best to pay your mortgage as often as you’re paid. Paying more frequently can result in slightly lower interest costs but this varies between banks. Our staff can advise more on this.

Low equity fee or margin

If you need to borrow more than 80% of the purchase price of your new home, banks will charge you either a low equity fee or a margin.

Both kinds of fees have plusses and minuses.

orange house behind a fence

Low equity fees

A low equity fee is a one-off charge, which can be added to your mortgage so you don’t have to cover it up front. The advantage of a fee is that you pay it and move on.

Lender <90% >90%
ANZ 0.25% - 0.75% 2.00%
Kiwibank 0.25% - 0.50% 0.80%

Low Equity Margin

A low equity margin is basically a higher interest rate on your mortgage, because the banks see lending more than 80% as a risk, which they want to cover by charging you more. Nice of them, eh. 

The higher the LVR (loan-to-value-ratio) the more they'll charge you, so the faster you can pay principal off the mortgage to gather equity and (reduce your LVR), the sooner you can stop paying the margin. We often recommend renovating what you can (as cheaply as possible) to add to the value of your house. 

Note that in most cases, you can't remove the margin until your fixed rate is due which means that even if you happen to drop below 80% LVR you can't remove the margin unless you break your loan (which may incur break costs). The only exception to this is BNZ who will remove the margin mid fixed term. Here's a list of the banks and what their margins are.

Lender 80% - 85% LVR 85% - 90% LVR 90%+ LVR
ANZ 0.25% 0.75% 2.00%
ASB 0.30% 0.75% 1.30%
BNZ 0.35% 0.75% 1.00%
Westpac 0.25% 0.75% 1.50%
Kiwibank  0.25% 0.50% 0.80%

Clear as mud? If you've got questions, we're happy to chat.

FAQs

What is pre-approval?

With a pre-approval you haven’t borrowed any money or bought anything yet – it’s just the bank saying they’re happy to lend to you under a few conditions – often this is a valuation on the house you’re thinking of buying. A pre-approval is a great way of getting ready to snap up the right house when you find it – you’ll know how much you can borrow and be in a better position to negotiate. Get pre-approved for your mortgage now.

Pre-approval is valid for 3 months, but if you haven't bought in that time we can usually extend it for you.

How long does it take to get finance?

It normally takes less than three days to arrange finance but it pays to get organised ahead of time. Every now and then, the banks can be a bit slow, especially if the mortgage is over 80% of the property’s value. So, if you are borrowing over 80%, allow for 5-7 working days to get an approval. Bottom line is, the earlier you talk to us and get things rolling the easier it’ll be for all.

What paperwork is required?

Quite a bit, but we try and reduce it for you. First you have to fill out a form with all your assets, debts, income and expenses. You’ll need to prove your income, that you have a deposit saved and three months of bank statements. The bank and your Squirrel mortgage advisor might also run credit checks.

Will I be able to get a loan?

Short answer: probably. Lending criteria is different from bank to bank so we’ll help you shop around for the best deal. If you go direct to your bank you’ll have less chance of securing the right loan (or any at all) because they can only give you one solution.

Can I borrow over 80%?

Yes, if you have a good income and no other debts. Below 80% you can borrow 5x your income. At 90% you can only borrow 4x your income because the lender will make you pay off your mortgage faster.

Borrowing over 80% also costs more. The bank will either charge you a low equity fee of up to 2.5% of the mortgage value or they’ll add a premium to your mortgage rate which will be 0.50%-1.00% more than a standard rate. The fee can be added to your mortgage so you don’t need to find the cash right away. A registered valuation will also be compulsory, which will cost around $500 and you’ll need ongoing mortgage or income protection insurance. One of our insurance advisers can help you organise your insurance.

 

What if I'm self-employed or a contractor?

If you’re self employed or a contractor there are a few more hoops you’ll have to jump through. To borrow over 70%, you need to have been doing what you do for more than two years and have a record of your earnings. If you have low expenses and work in an industry that regularly uses contractors, like project management, IT or film, the bank will be more flexible, but will still usually need a 15%-20% deposit.

Can I use a guarantee?

If you have less than a 20% deposit your family can guarantee the difference. This is limited to a maximum of 20% so Mum and Dad won’t risk losing everything if you fall over.

How do second mortgages work?

Essentially it’s putting two mortgages in place. The first is for 80% of the property, with a small second mortgage for a further 10%. This can be a very cost effective (and flexible) way of borrowing. We still do second mortgages but the market has become a lot tougher.

What is vendor finance?

Vendor finance is where the seller leaves equity in the property (as a second mortgage.) It is a loan that you’ll have to pay back. Ideally the vendor finance is charged at a market interest rate. Vendor finance is trickier and only really works for people with no deposit but high incomes and no other debts.

How much can I borrow to buy an apartment, townhouse or bare land?

The maximum amount that can be borrowed for apartments, townhouses, and lifestyle blocks is 80% of the property value. With bare land it varies between 70% and 80% depending on the lender and location. Lifestyle blocks must be less than 10 hectares.

What if I'm buying a house that's yet to be built?

If you are building a new house you’ll find most lenders will only go up to 80%, but we can often sort you out with up to 90%. With a new build you should get a fixed price contract with a master or certified builder so their work will be guaranteed. Before the mortgage is fully approved you will need to get a registered valuation. Then along with the builder and the lender, we’ll work out when progress payments will be made during the build. At each stage the bank may ask for an updated “as is” valuation. This is them checking that you haven’t blown the budget – you’ll need to stay below the lender’s loan-to-value cap (generally 80%) throughout the build. Most banks lend against the project cost. Sovereign is a bit different and lets us use an acquisition price that makes allowance for “reserves” and interest capitalisation. This makes them a good choice for these types of mortgages.

What if I don't live in New Zealand?

If you’re a non-resident you’ll only be able to borrow 70% of the property value. If you work in NZ but don’t have permanent residency your maximum borrowing will be 80%.

We can help. Chat to one of our advisers today.

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