Taking out a mortgage may well be the biggest purchase of your life. There are many different types of mortgage agreement to choose from, and it's a good idea to 'shop around' to get the best deal and one that suits your needs. Most lenders require a deposit, and this is often around 20% of the value of the property. For a house worth $350,000, that would be about $70,000.
Your income levels and the size of your deposit (compared to the value of the house you are interested in) will determine how much you can borrow, the length of your mortgage and the amount of your repayments. You’ll generally find that most of your earlier repayments go towards paying off interest rather than the amount you have borrowed (the ‘principle’).
If you move house during the term of your loan you can usually transfer the mortgage from the old house to the new one.
I'm thinking of buying a house. What are the differences between floating and fixed rate mortgages?
You can get a mortgage at a fixed interest rate, a floating interest rate, or a combination of the two.
Fixed rate mortgage repayments on a six-month to five-year (or even longer) plan allow you to budget for regular unchanging repayments and protect yourself against a rise in interest rates for a certain period of time. With a fixed rate mortgage:
- the interest you pay on your loan will be set at a certain percentage for between six months and five (or more) years
- you will know exactly how much you have to repay, and can budget for this
- the fixed rate offered by a lender is often lower than their floating rate
- if interest rates go down, you won’t be able to benefit from that – but on the other hand if they go up, you’ll be secure in knowing that the amount of interest you have to pay won’t go up. No-one ever knows for sure what is going to happen in the future mortgage market.
- at the end of the fixed rate period you can choose to go for another fixed rate term, or move to a floating rate.
The down-side of fixed rate mortgage plans is that they are not flexible. If you have other debts that you want to consolidate using your mortgage, it can be very difficult to do this. There may be restrictions on whether you can make early or extra repayments, and you will likely be charged early repayment penalties if you do. If you decide to ‘break’ the fixed rate loan e.g. transfer to a different fix rate during the fixed rate period, you might have to pay ‘break’ fees. Depending on your circumstances these fees can be very large. Make sure that you find out about all of these charges before you enter into any agreement.
With a floating rate mortgage, the amount of your repayment will go up and down as the market interest rates change. A floating rate mortgage plan can be a good option if you need flexibility to cover potential changes in your situation, want a way to consolidate your debts, or think that mortgage rates might decrease over the next year or two. If you choose to go with floating mortgage repayments:
- you will generally have more flexibility in making changes to the mortgage, such as extending the time period of the mortgage payments
- you will generally be able to make higher or extra repayments and be charged a smaller corresponding early repayment fee (or none)
- it will generally be easier to consolidate other debts by adding them on your mortgage
The down-side of this more flexible arrangement is that the lender’s floating rate is likely to be higher than their fixed rate. Also, if the rate goes up it will affect your repayments directly, so that you won't be able to budget as effectively.
Combination of fixed and floating rates
It is also possible to choose a combined agreement. This means that your debt is split, with part of it managed on a fixed interest rate, and part of it managed on a floating rate. Under this method, you can make early repayments on the floating portion and there is less movement in the interest rate on the fixed portion.
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What happens if I pay my mortgage back early?
If your mortgage is a floating rate one, then you will probably be able to make extra payments or larger payments without incurring any early repayment charges – but you should check this with your mortgage provider.
With a fixed rate mortgage you are more restricted. Your extra repayments may be limited to a specified minimum or maximum amount, and you will probably be charged an early repayment fee. The amount of this fee will vary depending on the mortgage agreement you have made, but it can often be very substantial so make sure that you find out all the charges before you make any decisions.
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How can I protect myself against being unable to pay my mortgage?
Some lenders require borrowers to have life insurance to cover your mortgage if you die. Other lenders may require mortgage protection insurance which can cover your mortgage payments if you die, become ill or injured so that you are unable to work, or are made redundant (the cover varies depending on the insurance provider and the policy). Also see the information below about what to do if you are facing hardship meeting your mortgage payments.
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Can I get a mortgage without a deposit?
Most lenders will require a deposit from you (generally around 20 percent). Just how big a deposit you need will depend on the lender and the type of property you intend to buy. Lenders willing to provide mortgages for no deposit or a very low deposit will generally only do so for borrowers who can show that they have a good, reliable income and a reasonable amount of savings.
There are other options for people who are buying their first home and don’t have enough for a deposit:
Welcome Home Loan
Supported by Housing New Zealand (HNZ), this loan is available for people buying their first home, who can afford to make mortgage repayments but don’t have a big deposit. Eligible people can borrow up to $550,000 (the maximum varies from region to region) with a deposit of just 10 percent.
To be eligible:
- you must be a New Zealand citizen or permanent resident
- for one borrower your income must not exceed $80,000 before tax
- for two or more borrowers the household income must not exceed $120,000 before tax
If you’re interested in getting a Welcome Home Loan, call 0508 Welcome Home (0508 93 52 66) or one of the associated providers. More information is on the Welcome Home Loan website.
HomeStart - KiwiSaver first-home withdrawal
If you have been contributing to a KiwiSaver fund for at least three years and are buying your first home, you may be eligible to apply to withdraw some of your funds early.
You can withdraw up to the full amount, minus the Government’s $1000 start-up amount. The withdrawal is managed by your KiwiSaver provider, so if you want to use your KiwiSaver funds to buy your first home, you’ll need to contact them.
More information about KiwiSaver first-home withdrawal is on the Housing New Zealand website. You may also be eligible if you have previously owned a home.
If you've been contributing to KiwiSaver for more than three years you may also be eligible for the HomeStart grant. The amount of the grant varies depending on how long you have been contributing and whether you are buying a home, or land to build a home on. More about this is on the Housing New Zealand page.
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What is a rent to buy scheme and are they a good idea?
A rent to buy scheme (also known as ‘rent to own’ or ‘lease to purchase’) is aimed at people who can’t easily obtain a mortgage to buy a home e.g. due to a poor credit history (or no credit history), irregular income, or lack of deposit.
In essence, you pay an up-front amount followed by regular weekly rent payments. The payments include both rent and something towards a deposit. You can keep this up until you have enough for a deposit for a bank mortgage - based on the estimated value of the house by that time - at which point you have the option of buying the house.
Some things to watch out for:
- Check whether the scheme provider will charge you any non-refundable fees for their service – these fees don’t go towards your deposit.
- Your weekly payment might be much higher than if you were just renting a similar property, since those payments include amounts going toward your deposit, and interest.
- If you choose not to buy the house at the end of the rent-to-buy period (or are unable to e.g. because you couldn't get a mortgage), you will lose the money that you’ve already paid towards the scheme.
- Your mortgage application could still be turned down even after you have saved up a deposit.
- There have been instances where an unsuspecting rent-to-buyer had their house repossessed by a mortgage provider, because the previous owner had defaulted on debts (e.g. owed to a mortgage provider). To avoid this happening to you, make sure the seller actually owns the house by checking with Land Information New Zealand (LINZ) that the seller’s name is on the certificate of title.
Rent to buy agreements are a form of credit contract, which means that you would have some protection under the Credit Contracts and Consumer Finance Act (CCCF), for example regarding things like a 'cooling-off' period, disclosure and a hardship provision.
If you’re thinking of signing up to a rent to buy scheme, we strongly recommend that you consider other options first (e.g. talking to your bank or mortgage broker, asking family members to contribute to a deposit, or the options discussed in the previous question. If you still think this is your best bet, do obtain independent legal advice first.
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What does a mortgage broker do, and should I get one?
A mortgage broker is someone who offers (usually) free advice to people who want to get a mortgage to buy a home or other real estate. They would try to find the mortgage product which best suits their client’s needs. The broker is normall paid a commission by the provider of the chosen mortgage product.
It can be a good idea to obtain the services of a mortgage broker if you don’t want to spend time investigating the options yourself. A broker may also be able to get you a mortgage from a non-bank lender (e.g. building societies, finance companies, credit unions) who will only deal with brokers. Also, because mortgage brokers have to be Registered Financial Advisers, there is a clear complaints process to follow if you are unhappy about the service you are getting from your broker.
On the other hand, not all lenders will deal with brokers and some brokers won’t cover all lenders. Also, if some lenders pay more commission to brokers than other lenders, then the broker could be tempted to simply steer you towards the mortgage product which earns them the most money.
If you’re thinking of using a mortgage broker, make sure you find out:
- what, if any, fees they will charge you
- which mortgage providers they deal with
- what commission they receive from the different lenders
You can also check out the interest rates charged by a range of lenders, so you have some idea of your mortgage options.
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I'm having difficulty with the mortgage repayments. What are my options?
It is very important to contact the lender as soon as you realise you are having problems (or will soon have problems) with repaying your mortgage, because the sooner you take action the more likely it is that the issue can be resolved. Many lenders are willing to negotiate a payment plan to tide you through a difficult time, as long as you get in touch with them as soon as possible.
If you can prove that you’re suffering significant financial hardship:
- you may be able to withdraw money from your KiwiSaver funds and use this to pay your mortgage
- you can apply to your mortgage provider under the hardship provision, for an extension of your mortgage, a repayment holiday or similar.
You may be able to claim on mortgage repayment insurance if you have it.
Even if you can't apply under the hardship provisions, you should still notify the lender (or your mortgage broker, if you used one) and ask whether they are willing to come to an arrangement which helps you to make your repayments. If you are not able to negotiate an arrangement with the lender, they may begin the debt recovery process (see the next question).
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What will happen if I don’t make my mortgage repayments?
If you don’t meet your repayment obligations (this is called defaulting), the mortgage provider may send you a letter of demand. This is the first step of the debt recovery process.
1. Letter of demand
If your repayments become overdue, the lender will send you a demand letter. It will say how much you owe in arrears (overdue repayments), and how long you have in which to pay this amount.
The letter will say how much you owe in arrears (overdue repayments), and demand payment by a specific date.
When you receive this letter, contact the lender and ask whether it’s possible to agree on a repayment programme which makes it easier for you to repay your debt (if you haven’t already done so).
If the mortgage provider will not agree to a repayment programme for you, get some legal advice and consider either selling your house or refinancing with another lender.
You can read our information about selling your house privately or through a real estate agent. If you sell now, you’ll probably get a better price for it than if it is sold at a mortgagee sale.
2. PLA notice
If you haven't paid back the amount specified in the letter of demand, the lender may issue a Property Law Act (PLA) notice, which states that you are in default and tells you to pay a certain amount by a certain date (which is at least 20 working days after the notice is issued).
If you haven't already done so, contact the lender about a repayment programme and/or get legal advice.
3. Foreclosure / mortgagee sale
If you don’t pay the amount specified in the PLA notice by the due date, the lender will have the right to sell your property in order to recover the loan amount, interest and other costs.
They must take reasonable care to get the best price for the house, which can include getting an independent valuation and appointing a real estate agent to market the property. The lender may pass on these costs to you.
4. After the mortgagee sale
If the house sells for less than the amount you owe, you will be liable for the shortfall. The lender may agree to enter into a repayment programme for the balance of your debt, or they could choose to take recovery action.
You could also be liable for early repayment costs, if your mortgage was on a fixed rate at the time.
You can read more about mortgagee sales is on the Banking Ombudsman Scheme website, or about managing your debt on our Credit and Debt Management page.