Mortgage & Home Loan Questions

Both options have advantages. Here's how they compare: **Mortgage broker advantages:** - Access to multiple lenders (banks, non-bank lenders, credit unions) - Can compare rates and terms across the market - May find options you wouldn't discover on your own - Usually free for you (paid by the lender on settlement) - Handles paperwork and negotiation - Useful if your situation is non-standard **Going direct to a bank:** - You deal with one institution from start to finish - May offer loyalty pricing if you're an existing customer - Simpler process if you know which bank you want - Some banks offer exclusive products not available through brokers **When a broker is particularly valuable:** - First home buyers unfamiliar with the process - Self-employed borrowers (banks have different criteria) - People with complex income or credit history - When refinancing and wanting to compare options - When you don't have time to approach multiple banks yourself **The cost:** Brokers are typically paid a commission by the lender (upfront + trail). The interest rate you pay should be the same whether you use a broker or go direct. Some brokers charge a fee for complex applications.

The deposit requirement depends on several factors: **Standard requirements:** - **20% deposit:** The standard requirement from most banks. On a $700,000 home, that's $140,000. - **Below 20%:** Possible but subject to Low Value Ratio (LVR) restrictions set by the Reserve Bank. Banks can only allocate a limited percentage of new lending to low-deposit borrowers. **Low-deposit options:** - **10% deposit (first home buyers):** Banks have some allowance for first home buyers with 10% deposits, though you'll likely pay a higher interest rate or a low-equity margin. - **5% deposit (Kainga Ora First Home Loan):** Government-backed scheme for eligible first home buyers meeting income and property price caps. - **Family guarantee/gift:** Some banks accept a family member's property as additional security, reducing or eliminating the deposit requirement. **Additional costs to budget for:** - Legal fees: $1,500-$3,000 - Building inspection: $400-$800 - Valuation (if required): $500-$1,000 - Moving costs - Immediate maintenance or repairs **KiwiSaver withdrawal:** Remember you can withdraw most of your KiwiSaver balance for a first home purchase after 3 years of membership. A mortgage broker can advise on the best deposit strategy for your situation and identify which lenders offer the most competitive terms for your deposit level.

**Fixed rate:** Your interest rate is locked for a set period (typically 6 months to 5 years). Your repayments stay the same during this period regardless of what happens to market rates. **Floating (variable) rate:** Your interest rate moves up and down with the market. Repayments can change at any time. **Fixed rate advantages:** - Payment certainty — easier to budget - Protection if rates rise - Generally lower than floating rates in NZ **Fixed rate disadvantages:** - Break fees if you want to repay early, sell, or refinance during the fixed period - If rates drop, you're locked in at the higher rate - Less flexibility for extra repayments (though most banks allow some) **Floating rate advantages:** - Full flexibility to make extra payments or repay in full - No break fees - Benefits if rates decrease **Floating rate disadvantages:** - Higher rate than fixed (usually 1-2% more in NZ) - Payments increase if rates rise - Harder to budget **Common NZ strategy:** Split your mortgage — put most on fixed rate(s) for certainty, and keep a portion floating for flexibility. Some people fix different portions for different terms (1 year, 2 years, 3 years) to spread their interest rate risk. A mortgage broker can advise on the optimal rate structure based on current market conditions and your personal circumstances.

Banks assess your application based on several factors. Here's how to strengthen each one: **Income and employment:** - Stable employment history (at least 3-6 months in current role) - Provable income (payslips, employment contract) - Self-employed: at least 2 years of financial accounts - Avoid changing jobs during the application process **Savings and deposit:** - Show genuine savings over time (not just a lump sum gift) - Larger deposits improve your chances and your rate - Demonstrate consistent saving habits **Credit history:** - Check your credit report before applying (via Centrix or Equifax) - Clear any unpaid debts or defaults - Avoid applying for other credit in the months before your mortgage application - Ensure all bills are paid on time **Spending habits:** - Banks review your bank statements (typically 3 months) - Reduce discretionary spending in the lead-up - Cancel unused credit cards or reduce limits - Pay off buy-now-pay-later balances **The application:** - Have all documents ready upfront - Be honest and accurate — discrepancies cause delays or declines - Get pre-approval before house hunting A mortgage broker can review your situation before you apply and identify areas to strengthen. They know what each bank is looking for.

Pre-approval (also called conditional approval or approval in principle) is a preliminary assessment by a bank or lender indicating they would lend you a certain amount, subject to conditions. **What it involves:** - The bank reviews your income, expenses, credit history, and deposit - They issue a letter stating the maximum they'd lend you - Typically valid for 3-6 months - Usually conditional on a satisfactory property valuation and other checks **Why it matters:** - **Confidence:** You know your budget before you start looking - **Speed:** When you find a property, you can move quickly (important in competitive markets) - **Credibility:** Real estate agents and vendors take you more seriously - **Auction readiness:** Essential if you want to bid at auction (unconditional) - **Avoids disappointment:** No falling in love with a property you can't afford **What pre-approval is NOT:** - It's not a guarantee of final approval - The bank can still decline if the property doesn't meet their criteria - Your financial situation must remain the same until settlement - It doesn't lock in an interest rate A mortgage broker can help you obtain pre-approval efficiently and advise on which lender is best positioned for your situation.

Refinancing means moving your mortgage to a new lender or restructuring with your current one. Consider it when: **Good times to refinance:** - Your fixed rate is about to expire (6-8 weeks before expiry) - Market rates have dropped significantly since you fixed - Your financial situation has improved (better rates available) - Your property has increased in value (lower LVR = better rates) - You want to consolidate other debts into your mortgage - Your current bank's service is poor **When it might NOT be worth it:** - You're mid-way through a fixed term (break fees can be significant) - The rate difference is small (less than 0.25-0.50%) - You plan to sell soon - Switching costs outweigh the savings **Costs to consider:** - Break fees (if leaving a fixed rate early) - Legal/conveyancing fees: $500-$1,000 - New lender valuation: $0-$500 (often waived) - Discharge fee from existing lender: $50-$200 **Cash-back offers:** Many banks offer cash contributions ($2,000-$10,000+) to attract new borrowers. Factor this into your comparison but don't let it override a genuinely better rate. A mortgage broker can calculate whether refinancing makes financial sense after accounting for all costs and can negotiate on your behalf.

Banks use two main tests to determine your borrowing capacity: **1. Debt-to-Income (DTI) ratio:** Banks typically cap total debt at 5-6 times your gross annual income. - Single income $80,000: Maximum mortgage approximately $400,000-$480,000 - Combined income $150,000: Maximum approximately $750,000-$900,000 **2. Serviceability test:** Banks calculate whether you can afford repayments at a test rate (usually 2-3% above the current rate, to ensure you can handle rate increases). **Factors that affect your maximum:** - **Increase it:** Higher income, larger deposit, minimal other debts, stable employment - **Decrease it:** Existing debts (car loans, student loans, credit cards), high living expenses, irregular income, dependents **Important:** The maximum you CAN borrow isn't necessarily what you SHOULD borrow. Consider: - Can you still live comfortably with the repayments? - What if interest rates rise 2-3%? - What if one income stops temporarily? - Do you have a financial buffer? **A useful test:** Can you maintain your desired lifestyle while making repayments at the current rate + 2%? If yes, the mortgage level is likely manageable. A mortgage broker can provide a detailed borrowing capacity calculation specific to your situation and identify which lender will offer the highest amount.

Beyond the deposit and purchase price, budget for these costs: **Before settlement:** - **Legal fees:** $1,500-$3,000 for conveyancing - **Building inspection:** $400-$800 (strongly recommended) - **Valuation:** $500-$1,000 (sometimes required by lender, sometimes waived) - **LIM report:** $200-$400 (Land Information Memorandum from the council) - **Due diligence costs:** Title search, property file request **At settlement:** - **Mortgage registration fee:** $100-$200 - **Moving costs:** $500-$3,000 depending on distance **Ongoing costs (often underestimated):** - **Rates:** $2,000-$6,000/year depending on location and property value - **Insurance:** House insurance $1,500-$4,000/year; contents insurance $300-$800/year - **Maintenance:** Budget 1-2% of property value annually ($5,000-$15,000) - **Body corporate fees:** $2,000-$8,000/year for apartments and townhouses **First home buyer costs:** - **KiwiSaver withdrawal fee:** Usually nil, but check with your provider - **First Home Grant application:** Free **Total "hidden" costs:** Budget $5,000-$10,000 above your deposit for upfront costs, plus significantly higher ongoing costs than renting. A mortgage broker will factor these costs into your borrowing calculation to ensure you're not stretched too thin.

An offset mortgage links your savings account(s) to your mortgage. Your savings balance is "offset" against the mortgage balance, so you only pay interest on the difference. **Example:** - Mortgage balance: $500,000 - Savings account: $50,000 - You pay interest on: $450,000 - Your savings earn no interest (but the tax-free mortgage interest saving is usually worth more) **Benefits:** - Effectively earn a tax-free return on your savings equal to your mortgage rate - Maintain access to your savings (unlike making extra mortgage repayments) - Can significantly reduce total interest paid and shorten the mortgage term **Availability in NZ:** Offset mortgages are available from some NZ lenders but are less common than in Australia or the UK. Typically available on floating rate portions only. **Who benefits most:** - People with significant savings they want to keep accessible - Self-employed people who maintain cash reserves for tax or business purposes - Those saving for a specific purpose but wanting mortgage interest savings in the meantime **Alternative:** A revolving credit facility works similarly — your mortgage acts like a large overdraft, and your salary goes in each month, reducing the balance you pay interest on. A mortgage broker can advise whether an offset or revolving credit structure suits your situation.

This is one of the most common financial questions in New Zealand, and the answer depends on your situation: **Paying off the mortgage faster:** - Guaranteed "return" equal to your mortgage interest rate (tax-free) - Reduces risk — you own your home outright sooner - Psychological benefit of being debt-free - Simple and straightforward **Investing instead:** - Potential for higher long-term returns (especially in shares/growth funds) - Builds diversified wealth outside of property - Investments are more liquid than home equity - Tax advantages of PIE funds (28% max vs up to 39% personal rate) **The maths:** If your mortgage rate is 6% and you expect investment returns of 8% (after fees and tax), investing may build more wealth over time. But investments can lose value while mortgage repayment is risk-free. **A balanced approach many NZ advisers suggest:** 1. Contribute enough to KiwiSaver for full employer + government match 2. Make some extra mortgage payments (even $100-$200/week makes a big difference) 3. Build an emergency fund 4. Consider additional investing once mortgage is below 50% LVR **Key factor:** Your risk tolerance. If the thought of debt keeps you awake, paying off the mortgage is the better choice for you regardless of what the maths says. A financial adviser can model both scenarios with your actual numbers and help you find the right balance.

When your fixed rate term ends, you have several options: **What the bank does automatically:** If you don't act, your mortgage typically rolls onto the bank's floating rate, which is almost always higher than any fixed rate. Avoid this. **Your options:** 1. **Re-fix with your current bank:** Choose a new fixed term (1-5 years). Contact them 4-6 weeks before expiry to discuss rates. 2. **Negotiate:** Banks often offer better rates than advertised, especially to retain customers. Ask for their best rate or mention competitor offers. 3. **Refinance to another lender:** If another bank offers a materially better rate, consider switching. Factor in any costs. 4. **Split your mortgage:** Fix different portions for different terms to spread your interest rate risk. 5. **Move to floating:** If you're planning to sell, make a large lump sum payment, or want maximum flexibility. **Timing matters:** - Start researching rates 6-8 weeks before expiry - Most banks let you lock in a rate up to 60 days ahead - If rates are trending up, locking in early protects you - If rates are trending down, waiting might get you a better deal **What a mortgage broker does:** Shops the entire market, negotiates on your behalf, and handles the paperwork — usually at no cost to you. Set a calendar reminder 8 weeks before each fixed rate expiry so you're never caught off guard.