Understanding your 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.

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.

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%

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%