How should I structure my mortgage?
First off, let’s break down what a mortgage is… The word mortgage is most often used as another term for a home loan. A mortgage is the pledging of a property to a lender to be used as security for a loan.
The borrower, that’s the mortgagee, pays the loan back to the lender, known as the mortgagor, in instalments over an agreed set period of time called the term. The mortgage secures the mortgagee’s legal obligation to repay the lender. Borrowing money incurs costs and no one lends you money for free. The lender makes a business out of these transactions by charging interest on the amount you have borrowed.
Mortgage Payments
Most New Zealand home loans have a mortgage term of between 15 and 30 years. The repayments are divided into equal amounts over the term, typically weekly, fortnightly or monthly. The amount you will pay depends on the interest rate and term you choose. A portion of the repayment amount pays the interest charged by the lender, while the difference goes towards paying back the principal, the amount you borrowed. If you choose to place all or part of your loan onto a fixed rate, your payments will stay the same for the whole fixed period but, with each payment, the interest portion decreases and the balance paid off the principal increases. This process is called ‘amortisation’. Check out our calculator which will show you how much your repayments will be and click the ‘Table’ button to show the accumulated amounts paid.
Remember, the bigger deposit and higher instalments you pay, the less interest you’ll end up paying over time. Don’t leave yourself short of funds to cover living expenses and costs of owning a property though. Putting any unexpected windfall that comes your way into paying off your mortgage can be your most effective way of saving money in the long run.
Here’s an example of how your weekly repayments can vary with a $400,000 mortgage…
| Interest rate: 3.55% Fixed for 1-year
Term: 30 years Repayments: $417 |
| Interest rate: 3.55% Fixed for 1-year
Term: 20 years Repayments: $537 |
| Interest rate: 5.15% Floating
Term: 30 years Repayments: $504 |
| Interest rate: 3.89% Fixed for 3-years
Term: 30 years Repayments: $435 |
Mortgage Options
There are lots of mortgage options on offer at various 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, offsetting some of your savings from your mortgage balance as well as revolving credit facilities or Flexi accounts where you agree a limit that can be redrawn, a bit like a BIG overdraft.
You need to find the plan that suits you best. As a home loan specialist, we can give you advice based on your unique financial situation, assess your eligibility and prepare your application to perfectly meet the requirements of the lender that we believe offers the best plan for you.
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. However, your mortgage 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 will offer the option of having a portion of your payments on a floating or variable 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 October 2019, floating rates in New Zealand are currently hovering around 5% 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. Current interest rates can be found at goodreturns.co.nz.
As you can see, choosing a structure for your home loan is a big decision and one that can leave you locked in for a period of time, which is why it is important to get it right for your circumstances. There is no ‘one size fits all’ solution when it comes to repayments so speaking to a Mortgage Adviser will allow you to get expert advice on what is the best option for you.
Stay tuned for next week’s blog post on the different types of property listings you may see when hunting for your first home…