It’s a befuddling, confusing, daunting experience. Whether it is your first home loan, or figuring out how to use your equity to purchase investment properties for your portfolio, dealing with banks to get them to loan you hundreds of thousands of dollars is riddled with questions and consequences.
So you need to be on your game. You need to be as clued up as possible so that you are making the right decisions for your future. Because every person’s situation and experience is different. Although our professional team does their best to align your goals with a possible reality, if you don’t know what your goals could be or what your future might look like, you’re not thinking as big as you should be.
Are you one of those people who remember heaps of unasked questions late at night after a meeting with your banker that afternoon? Do you feel like you’re nodding along in agreement with your mortgage advisor, only to pour over the information later on so that you completely understand? Perhaps you simply want to make sure you’re up to date with all the latest buzz words and trends.
If so, then get comfortable, because you’re in for an all too necessary look into all things home loans.
Welcome to our Mortgage 101.
What is a home loan?
A home loan, otherwise known as a mortgage, is a sum of money, loaned to you by a lender in order to purchase a property. There are conditions to this loan that you agree to when signing a contract to receive the money. Should you not stick to the terms laid out in this agreement, the contract is void with unfortunate consequences.
This can neatly be summarised in the understanding of the word mortgage. It comes from the old French words mort, meaning death and gage, meaning pledge. Literally, the land pledged to us would be dead to us if we did not uphold the agreements of the loan. In turn, should we fulfil the terms, the pledge itself dies. If you’d like to delve more into the history of mortgages, then take a look at exactly what a mortgage is examining exactly what a home loan is.
You generally speak to a bank for a home loan as they are the most traditional lenders available in New Zealand. However, non traditional lenders are still possible, boasting competitive rates. Depending on what your very bespoke situation may be, you may find traveling a path less trodden suits you better and that’s where a mortgage advisor is going to help.
We assess your needs and match you to a lender who is capable of providing you the amount needed for a property you desire, with potential benefits and conditions that suit you best. There are different home loan repayment schedules that you should consider. There’s more to home loans than meets the eye!
Why do I need a home loan?
There aren’t very many people who are able to buy a property outright, thus home loans have become a necessity in life. Dating back to the 1800s, home loans have proven to be a way for people to pay off the entire cost of a property in smaller, more manageable amounts. Likely using the property to their advantage in obtaining the necessary funds.
And you can do the same.
Whether you’re interested in building a property portfolio and allowing your money to work for you, or you simply want the joy of financial freedom, then you’re going to need to start somewhere. Unless you’re part of a small percentage of individuals who are in personal possession of large sums of cash, a home loan is where you are going to start.
Using a mortgage is effectively a leveraged investment strategy. You can use the debt that a bank considers a reasonable amount for you to take on to scale your investment assets. You can purchase property and make money from it.
By using a mortgage to get onto the property ladder and start earning capital gains, you are able to leverage that equity in coming years into investment properties so that you can start earning additional cash flow from either rental income or simply from further capital gain.
A home loan can set you up so that you can buy a home, possibly get flatmates to contribute to the mortgage, begin using the equity in that home to create income for yourself and reach financial security faster than you thought possible.
How do I get a home loan?
One of your first steps is understanding how much you can afford. You can use mortgage calculators online to provide you with a rough estimate to work on. With this as a guide, you can decide whether you can pursue getting a home loan, or whether you need to reduce any existing debt you have and increase your deposit.
You can do a credit check online yourself, it’s free and easy to do. A credit check provides information regarding how reliable you are. A rating above 700 is generally considered to be good.
A mortgage advisor can be a more knowledgeable support person at this stage. We can source home loan providers that are willing to give you what you’re looking for. We have come across banks lending $500,000 more than competitors, so it pays to work alongside a reputable and well known professional within this realm.
You can apply for a mortgage online, although you still need to be aware of what to take to your appointment. Whether it is face to face or over the internet, a mortgage advisor or banker is going to ask for the same basic information.
Make sure you have on hand:
- Photo ID, such as a driver’s license or passport
- Proof of address
- The last three months of bank statements. Namely the account that your income goes into, but the more information you can provide, the better.
- Your current budget
- Information regarding any debt you have
- Proof of your deposit
After applying for a home loan with the following information, either through your mortgage advisor or directly with any given bank, your application for conditional approval will be assessed. This isn’t full approval, but if successful you will be granted pre-approval. This means you are eligible for a home loan and you have precise information about how much you can borrow.
So, to clarify. In order to get a home loan, you need to do the following:
- Do a little background research by getting your credit rating and using mortgage calculators online to determine whether you may be eligible for a home loan.
- Get in touch with a mortgage advisor who can help you reach the right lenders regarding your current situation and future goals
- Acquire relevant documentation and set up an appointment to apply for a home loan
- Successfully gain pre-approval for a loan
- Find your property to purchase!
How much mortgage can I get NZ?
A bank looks at many factors when considering how much you are able to borrow on a home loan. Not only do they consider your income, but your ability to save, your attitude towards spending and repaying your debts on time, your budget and any dependants you might have. Every factor of life is calculated, giving them a clear cut decision as to whether you qualify for a home loan or not.
When looking at your income and budget, your uncommitted monthly income (UMI) is calculated, for example. By using a much higher interest rate than one they actually offer, a bank creates a budget for you to determine whether you can afford the mortgage you are hoping to obtain.
Although a deposit rarely has an impact on how much you are able to borrow, this is where reducing the amount of your home loan by contributing more cash to the initial purchase plays its part.
Look here for examples of what size mortgage you can get according to just deposit size:
Deposit of $100,000 + you can borrow $500,000 = buy for $600,000
Deposit of $150,000 + you can borrow $500,000 = buy for $650,000
To look at it a little differently,
A property costs $600,000 + you have a $100,000 deposit = you need a mortgage of $500,000.
A property costs $600,000 + you have a deposit of $150,000 = you only need a mortgage of $450,000.
You can pay off the latter mortgage faster, incur less interest costs and are more likely to be approved for the home loan as well.
There are only a few rare circumstances, such as when you are seeking a high LVR mortgage of more than 80% borrowing, where a bank might look at where you have obtained your deposit money. In general, it doesn’t matter whether you saved hard, were given the money or you won it.
The deposit you have is necessary not only for you to be approved for a home loan, but it also reduces the amount you need to pay back, reducing the monthly repayments and the interest charged.
When should I start looking for a home loan?
It is good to understand how much you are able to potentially borrow by researching with mortgage calculators and discussing your options with a mortgage advisor.
Pre approval should be sought if you are committed to buying a home within the next short while. They are only valid for 90 days after being signed off. Although they are free to obtain, you do want to be actively looking within that time frame to try and purchase a property.
What you shouldn’t do is find a property that you love and then embark on the time sensitive journey of obtaining a loan. Pre approval takes time, and with the housing market as red hot as it is, you need to be ready to go in order to even consider placing an offer on a property that you love.
If you’re asking the question, how quickly can I get a home loan fully approved, then simply put, depending on the complexity of your personal situation, it can take anywhere from a couple of days to a few weeks.
It can be a stressful time. If you’ve left it so your pre approved amount was due to expire, considerations may have changed for the bank. This means you may not only lose the property you have committed to buy, but your deposit as well.
To avoid being in this unfavourable position, keep your mortgage advisor close by and update them on any developments in your property purchase journey. With up to date information and knowledge of the financial situation and the likely position of the banks, they can advise you on whether to move quickly forward, arrange another meeting with the bank or get in touch with a new one for support.
Let’s talk about commercial mortgages
The word commercial can be explained by the intention to make a profit. When we talk about commercial mortgages, we are discussing property that is used for business, not just your intent to make a profit. In other words, stores and shops are commercial property, not your rental investments, which understandably do provide a profit.
A commercial home loan differs from a residential one in a few ways.
Commercial mortgages are available with all banks and can be structured in much the same way as residential mortgages do. Depending on your plans for particular property, such as whether you are interested in developing property, you may need to present with more security than simple equity on existing property, however.
Specialist commercial teams at major banks offer packages that could be ideally aligned to your goals, however it is difficult to know what bank might be best for you. Let the team at mortgagehq help you to find the best lender for you. Our expertise and experience means that you don’t have to spend countless hours researching information and talking to persuasive bankers to figure out who best to go with.
Can I apply for a mortgage online?
You can do anything online these days, can’t you?
Applying for a home loan is no different. Yes, you are able to apply for a home loan online. An online mortgage application will ask for the same information that you would need to provide if you were going in for a face to face appointment.
As a reminder, what you need to take to an appointment includes:
- Photo ID
- Proof of address
- The last three months of bank statements
- A current budget
- Proof of your deposit
Ensure that you enter these details through a bank’s legitimate website only, for your personal safety. There will be chances for you to upload copies of any documentation that you may have and follow standard security procedures regarding divulging any unnecessary personal data, such as passwords or credit card numbers.
Conditional approval may not be as quick as if you were applying directly. Some banks say that they can offer immediate pre-approval but state that they would need 3-5 days to consider an online application. Keep this in mind if you are looking for speedy pre approval of a mortgage. We would impress that you do not put undue time pressure on these situations and avoid tying your hopes to a property before you have taken these initial mortgage application steps online.
Where is the best place to apply for a mortgage?
Whether it is online or in person, you have a range of options here in NZ. You can choose to rely on the connection you have made with a mortgage advisor. We are able to assist you with the application process with certain banks for you. You can rest assured knowing that we are experienced at these things and can make the process that little bit more seamless and easy for you.
Especially if this is your first time in applying for a home loan, or you are new to investment for profit and are somewhat boggled with the complexities of it all, then having that professional by your side and looking out for your best interests can be extremely heartening.
The best bank for a home loan varies depending on your situation. It can be tempting to keep your banking all with one bank. It is not uncommon to wish to remain with the company that your everyday and savings accounts lie with. However, they may not be able to provide you with what you need. We have seen a variance of $500,000 between approval rates between banks, so it certainly helps to shop around.
You do not need to switch banks entirely if you choose to apply for a mortgage with a bank you are not familiar with. Mortgage banking can be a separate entity to your other banking needs. It is fine or even recommended in certain situations to even have mortgages with different banks as well. You can avoid any one bank having full control over your equity and gives you more freedom with multiple properties to continue investing.
But if switching banks is a necessity for you to make the most out of available offers, lower interest rates or to avoid cross security, then this is actually an easy move. Just ensure that you are aware of break fees by speaking with a professional and drawing up the figures and then simply follow the process as guided.
As for understanding who our best banks for a mortgage are here in NZ, this comes down to situational preference. For example, only a few major banks currently offer the flexible and appealing offset mortgage repayment schedule, so this might play a huge role in your decision making process.
Many people simply lean towards the bank who offers them the highest pre approval amount, but just because you are offered a certain figure, does not mean you should max that out.
By taking the time to forge relationships with all banks that could be suitable for you to have a home loan with and to have information readily available to support your property search, you can more easily identify which bank is best for a home loan for any given property.
All lenders from major banks to non-traditional lenders have their advantages and disadvantages that you need to weigh up to determine who the best bank for a mortgage is, for you.
Considering a non-bank mortgage?
There are more than 30, reputable non-bank lenders available in New Zealand, including Resimac, Avanto, Bluestone, NZCU Baywide, Liberty Finance, Peppermoney. Interest rates for these lenders are competitive with, although generally higher than, traditional bank lenders but could offer options that may be advantageous to you.
For example, non-bank lenders can be a little more flexible regarding who they work with. They are not bound by the same rules as banks and can consider self-employed professionals, investors who lack the necessary 40% deposit or people who do not hold the right residential status currently to have a mortgage with a traditional bank. They have created a niche for themselves just outside the reach of the banks, specifically within the realm of home loans.
A non-bank lender is really fast if you need them, a matter of crucial importance if a traditional bank is being too slow and a deadline is fast approaching for the settlement of a property.
For those with bad credit or low deposits, traditional banks may not look twice at you whereas a non-bank mortgage lender could offer a solution that benefits both of you.
Property flippers and traders benefit enormously here by understanding their relationship between banks and non-bank lenders. If you’re interested in taking advantage of the opportunities that are available, take a look at this video for a little more information.
Whether you are trying to build up your equity position or free up your servicing capacity to pay down your debts and reach financial freedom, then a non-bank lender on a revolving credit facility could provide you with the key to unlock your goals.
Consider speaking with one of our team or checking out our YouTube channel for ongoing lessons about how you can best make your position work for you. We believe there are solutions available for every property investor or would-be homeowner, if only the right approach be taken.
Mortgage application advice from the experts
Just to summarize what we have learned so far, home loans can be more complex than simply approaching a bank for money for a property that you wish to purchase.
- It is crucial that you identify your mid-term and long-term goals before embarking on any agreement with a lender. When you sign up for a home loan, you are locking yourself into a contract that can be costly to move on from in later years if need be.
- However pre-approval applications are free and easy to obtain. You can apply for them online even, giving you confidence to move forward with your property search.
- Pre-approved amounts do expire after 90 days
- The amount that you can borrow on a mortgage is determined by your income, expenditures and credit score. Your deposit is important for the overall amount you can purchase with, but has little bearing on the amount of a home loan.
- Considering multiple mortgages with traditional banks and non-bank lenders might allow you to free up your servicing capacity or build up your equity, allowing you to pay down your debt faster.
After you have been approved for your mortgage
Congratulations! You have received confirmation that your application was successful and you’ve embarked on the process of buying the property you wanted! It is important to know what your responsibilities are now, before you pop the champagne.
- Know your contract
Get a lawyer or a mortgage advisor to look through the fine print of your contract, both to help you to understand your obligations and to ensure that nothing is out of the ordinary. Just because you have gone with a traditional or well known and trusted lender for a home loan, does not mean that you should simply assume everything is standard when it comes to the contract.
You need to make sure that you understand what you are agreeing to so that you are able to fulfil them. Because as we learned before, a ‘mortgage’, or ‘dead pledge’, translated from Old French, will cease to exist if you do not abide by the terms and conditions laid out before you.
- Make repayments on time
One of the more simple responsibilities you must now adhere to is to make your repayments on time. If you do not do this, you will draw unwelcome attention from your lender and potentially alienate yourself from further borrowing as your credit rating will drop severely.
- Ensure you have the correct repayment structure
Whether it is a standard table loan, a revolving credit facility or an interest-only loan, each repayment structure has their advantages and pitfalls that you need to be aware of.
There is no ‘right’ or ‘wrong’ repayment scheme. You need to sit down with a mortgage advisor and understand what it is you are trying to achieve to make sure that the way you structure your home loan repayments helps you reach this goal.
- Be ready to make a move
And just when you thought you were comfortable, having made some goals and aligned your path to help you to reach it, you need to be constantly watching and ready to make a move if a better option becomes available. Because you could save $1000s by refinancing your loan or deciding to refix your home loan when possible.
Situations change, whether they are yours or the economy’s, so make sure that you have your finger on the pulse to not miss out on lucrative home loan changes.
Can I put my mortgage on hold?
Some extreme situations, such as the COVID-19 pandemic and subsequent lockdowns, gave leeway for people to put a pause on their mortgage repayments. There may be a time in your life where you find yourself unable to make the monthly repayments of your home loan. You need to contact the bank directly and provide valid reasons why not making your timely repayments is a temporary necessity for you.
However, these considerations are only made in very rare circumstances and do not last forever. Do not rely on lenders to continue allowing this. Known as a mortgage holiday, these less than ideal situations are dealt with differently by each bank, although can be extended for up to 6 months for those financially affected by Covid-19 in particular.
It is anything but a holiday. Whilst you pause your repayments, the interest continues to accumulate on to your principal. It is actually a deferral, just giving you time to get yourself back on track. Even though you can take up to 6 months, if you do not need to, the quicker you can return to repaying your mortgage, the better.
The next step if you are unable to continue to repay your mortgage is to break your contract and pay back the entirety of your loan. This is done through the selling of the property, known as a mortgagee sale.
Mortgage holidays are put in place for rare situations of community wide unease to allow for continued stability. If you feel like your bank is treating you unfairly during such a situation, you can speak with the banking ombudsman for support.
Home loans for first-home buyers
First home buyers have a few additional support packages available to them to help them cross that necessary 20% deposit threshold. These include current Kāinga Ora Home Loans and being able to use your Kiwisaver.
These tools have been put in place by the government to ensure that as many kiwis as possible can find financial security with home ownership. If you don’t know if you are taking full advantage of these as you look to buy your first home, do get in touch with us.
You do need to have a 20% deposit in order to purchase a property. The deposit does not need to come from your hard savings, the bank does not care. But if you do not fit into the standard eligibility criteria, such as you’re self-employed, a non-bank lender might be able to offer a more flexible solution for you.
Your UMI (uncommitted monthly income) will be calculated at a higher interest rate than what you will likely be charged, just to ensure that you are not extremely vulnerable to variations in the economy over the coming years.
Understanding the best repayment scheme for your new home mortgage is important and by using a mortgage advisor, not only will they help you understand what this may be, they will likely be able to increase the amount that you are pre-approved for, by finding the ideal bank for your situation.
Home loans for property investors
You have a few more considerations to factor in once you begin using the equity in your existing home to build your property portfolio. There are many more expressions you need to understand and be confident with, whilst holding firm to your mid-term and long-term plans.
The deposit % that you will need differs depending on whether you are purchasing a new building or not, although the standard rate is 40% for existing properties. You can find out more about how much deposit you need for a property in this article.
It may be wise that you consider applying for a home loan with a different bank, or even a non-bank lender to make sure all of your eggs are not placed in one basket, or that a single lender does not have full control over your finances.
A mortgage advisor from mortgagehq can show you proven methods for building equity and freeing up your servicing capacity that work in 2022
Using your mortgage to consolidate debt
Mortgage debt consolidation is when you take some or all of your existing debts and combine them on to your mortgage to benefit from lower interest rates so that you can pay them off faster. You can also extend out the repayments over a long period of time, so that you pay less month to month.
Consolidating your debt will reduce the amount of creditors down to a single one that you are needing to manage, making money matters an easier situation for you. You can feel more in control which may help you to overcome debt more effectively.
You can consolidate your debt when you own property through your mortgage by simply topping up your mortgage and paying off your existing debts all in full. As the interest rates on credit cards are generally between 20% and 22% whilst home loans are less than 4%, you are immediately saving a large percentage which you can put towards paying off the debts faster.
A few terms that you need to know
LVR: Loan to Value Ratio. This is the percentage of what a home loan is compared to the actual value of a property. For example, a good LVR is 80%, where 80% is the loan and 20% is what the borrower has contributed. Some situations allow for a high LVR, up to 95%. For property investors, a 60% LVR is common. You can find more information about property value here.
Fixed term: A fixed term interest rate is usually a little higher than variable rates, but are secured at this point for a number of months or years. This gives you security for that length of time that the interest rate is not going to change.
Floating rate: In contrast, a floating interest rate, or variable rate, constantly changes. When you choose this type of interest rate, you are subject to fluctuations in the amount of interest that you need to repay from month to month.
Pre Approval: Otherwise known as conditional approval. Does not mean that you have secured a home loan. This is a figure of how much you can borrow that you can work with to hunt for property and is valid for 90 days.
Principal: The principal of your loan is the actual amount that you initially borrowed. The overall amount you need to repay continues to grow as interest is added on however the principal reduces each time you pay a little bit off. Unless you choose an interest-only repayment structure.
Refinance: Happens on an existing mortgage when you transfer that mortgage to another bank to benefit from different conditions.
Restructure: Happens on an existing mortgage when you change the terms and conditions of your mortgage, but stay with the same bank.
Do you know what we do?
Mortgage advisors, like the team here at mortgagehq, offer a free service to clients, like yourself. We make sure you are aligned with the right lender for your needs. This is mutually beneficial to both yourself and the lender, as they earn interest from you and for that, we are paid by them when signing you up.
This of us as your banking insiders. We are a team who can show you how to structure your mortgage to minimise risk and achieve lower rates. If you want to know the ins and outs of the banking world and ensure your portfolio is on point, we have the tools to help.
We know the interest rates and all application criteria for all banks and many other reputable lenders in New Zealand and make negotiations on your behalf. We have built a strong reputation over the years which allows us to streamline the application process, making it a faster and more pleasant experience for you.
Often, when people embark on applying for a home loan without a mortgage advisor, banks say no. Usually, a mortgage advisor is able to negotiate a better deal for their clients than they would have been able to do themselves.
This is because we make it our business to know a bank’s policies, economic and property trends and all legal and financial matters regarding first home loans and all subsequent mortgage applications.
So whether this is your first time or you have built an impressive portfolio, getting in touch with us here at mortgagehq can give you peace of mind in knowing that you have experience on your side and that you are making wise decisions that will lead you towards a financially free future.