About home loans
- You pay back your loan over a term you set with the bank – usually up to 30 years.
- The money you borrow is called the principal (or sometimes capital)
- You’ll pay interest on the principal. This is calculated daily and charged to your loan when you make your regular repayments. With a long-term loan, you often end up paying more in interest than the amount you borrowed.
- There’s a fee to set up most home loans.
- Most home loans in New Zealand are called table loans. With a table loan, your regular repayments stay the same each time (except for changes in interest rate). At first, you’ll mostly be paying the interest on your loan, but as time goes on you’ll repay more and more of the principal.
If you need all your cash for building or renovations, you can get an interest-only loan for a short time (up to a maximum of three years). It’s a way to keep payments low while you need your money elsewhere – but since you’re only paying interest, all your principal will still be owed when the interest-only period ends. You’ll then have to start repaying principal and interest.
Structuring your loan
How you set up your loan determines how you’ll make repayments, what interest rate you’ll pay – and how you can make changes.
When you’re deciding how to structure your home loan, you’ll need to consider the term of your loan, how much you can afford to pay back each time, and the type of loan you have.
Set a goal of how much principal you want to repay each year. The more you can pay off, the less interest you’ll pay overall – and the less interest you pay, the faster you’ll pay your loan back. Try to pay back as much as you can while still leaving yourself enough money to live on.
Making payments fortnightly instead of monthly means you’ll make two extra payments a year – saving you interest in the long run. Because interest is charged in arrears, weekly payments are even better.
It’s usually a good idea to set your loan up in pieces. This gives you the flexibility to take advantage of any changes in the market, while keeping some security around your repayments.
There are several options, and you can put pieces of your loan on each of them. Your bank will help you figure out the best way to divide this up.
Fixed interest rate
The interest rate is fixed at a certain level for a set period of time. It gives you certainty about how much your repayments will be.
You can’t make voluntary extra repayments to a fixed loan – and if you want to change it or end it early you’ll usually have to pay break costs.
At the end of the term, a fixed interest loan automatically moves to a floating rate unless you negotiate another fixed term.
Variable interest rate
A variable – or floating – interest rate goes up and down as the market changes. You’ll make payments based on the variable rate at the time - and you can vary your payments and make lump sum payments without being penalised.
You can fix a variable loan anytime – usually there’s a fee for this.
Offset variable rate mortgage
With an offset mortgage, you can offset the balance of your savings and everyday accounts against your mortgage – so you only pay interest on the difference. You can link up to eight accounts to the offset portion of your loan (including family members’ accounts) – so you’ll save more in interest the more you have in the linked accounts.
- Low interest rate
- The more you have in your linked accounts, the more you save in interest
- Make lump sum payments anytime.
- Your savings stay separate – and you can’t withdraw money from your mortgage (like you can with a revolving credit loan)
- You can link family members’ savings and your everyday accounts.
- You don’t earn credit interest on your linked accounts (but the interest you earn on savings is generally lower than the interest you pay on a home loan anyway).
- There’s a $250 application fee.
Revolving credit loans are just like a large overdraft – or if you had a credit card that started at its limit. Your account sits in negative at the amount of your loan – there are no set repayments as long as your loan stays within the agreed limit.
Your pay (and any other money you want) goes straight into the account, and your bills and payments come out again – so your loan is always moving up and down. Because interest is calculated daily, it saves you money to have as much in the account as you can at any one time.
A revolving loan has a variable interest rate.
- You can make lump sum payments and re-draw money up to your limit
- You can pay your loan off faster if you’re dedicated.
- There’s no fixed repayments, so it’s good if you don’t have a fixed income.
- You can put any extra funds into this account to save you interest.
- There’s often an application fee and a monthly account fee, and there can be fees on your day-to-day transactions in the account.
- Because you can spend the money you’ve paid off, you need discipline to keep your loan going down.
Your bank should help you figure out how to split up your loan.
Documents you need to sign
There’s two separate documents you need to sign – your mortgage and your home loan agreement.
Your mortgage is the security for your loan – it outlines your obligations, any restrictions on your property, and gives your bank the right to sell or possess the property if you can’t pay for your loan.
Home Loan Agreement
Your home loan agreement sets out the terms and conditions of your loan – how much the bank is lending you, for how long, when payments will be made and what happens if you miss or are late with one. It will also tell you about your interest rate, and how you can make changes to your loan.
You’ll have to have house insurance in place before your loan will be settled – it’s usually a condition of your loan. House insurance protects you from financial loss if your home is destroyed or damaged in a fire, accident, storm or natural disaster.
To protect your furniture and belongings, you’ll also want to arrange contents insurance.
Loan insurance looks after your home loan payments if you die – and can cover your loan installments if you suffer an illness or injury and can’t work.
Now that you have a big asset – and a big debt – you might also want to consider Life & Living Insurance or income protection insurance.
If you have your home loan with a bank, you usually won’t be charged fees on your everyday banking – so if you’re setting up your mortgage with a new bank, you might want to open new everyday accounts at the same time.
Most banks will require you to open a separate "servicing account" for your home loan.
A will sets out your instructions in case you should pass away. You don’t have to have a will to buy a home, but you might want to think about getting one.
Kiwibank offers a free will service for its home loan customers. Your lawyer can also draw up a will for you (you could add it to your conveyancing bill).
You’ve got a house - nice one! Now you just have to move in.
A Kiwibank Welcome Home Loan is only available for owner-occupied properties and may not be used to purchase an investment property or for refinancing. You must not already own a home. A minimum deposit of 10% is required. A low equity fee may apply.
Borrowers who meet eligibility criteria may be able to use any KiwiSaver HomeStart grant and First Home Withdrawal entitlements to put it towards the purchase of their first home.
The Reserve Bank has set minimum deposit requirements on home loan lending. Home Lending that doesn’t meet these specifications has restricted availability. If you’re a first home buyer we’ll do our best to give you priority, but we can’t guarantee that we’ll be able to lend to you if your deposit is less than the minimum required and set by the Reserve Bank.
Kiwibank Welcome Home Loans lending criteria, terms and conditions, and fees apply.
This is intended as general information only. It does not take into account your financial situation and goals and is not personal advice. For advice about your particular circumstances please see a financial adviser, or make an appointment with a Kiwi Wealth Adviser. A disclosure statement required under the Financial Advisers Act 2008 is available, free of charge, from your Kiwi Wealth Adviser or on request by calling 0800 529 325.