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.
Maximum mortgage term
The maximum term is generally 20 years for mortgages over 80% of the purchase price and 30 years for mortgages under 80%.
Most banks allow fortnightly and monthly mortgage repayments. The best idea is to pay your mortgage as often as you’re paid – it’s not true that you’ll pay your mortgage off faster by paying fortnightly.
Interest-only terms can be for 5 or 10 years depending on the lender. Typically this option is only available to mortgages under 80% of the property value or purchase price.
Fixed rate mortgages give you certainty; you’ll know what your repayment amount is for a fixed term of between 1 and 5 years. 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’ll end up having to pay early repayment fees.
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.
Floating rate mortgages give you more flexibility. They 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 easily redraw funds if you have already repaid more than you need.
This is essentially a giant overdraft on your transaction account where the overdraft is at 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.
- Gives you easy access to funds and can smooth your mortgage if your income is lumpy or irregular.