Understanding your NZ mortgage

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.

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.

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

This margin is added to the mortgage rate and stays on the mortgage until you’ve gathered enough equity in the property. If you’re able to pay off the loan quickly or get additional value into the property through renovation, this can be much less costly than a one-off fee. Most often, 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 ASB who will remove the margin mid fixed term. 

At the 80%–85% LVR range, low equity margins usually sit around 0.25%–0.35%, and they can climb to around 0.75% when you’re between 85%–90% LVR. These margins can be added on top of either the bank’s standard rate or their special rates — and the way each bank handles them can vary quite a bit.

With the right bank, you could receive an even better offer if you’re purchasing a new build, so it’s worth chatting with your adviser to figure out which lender is best for your situation.