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Home Loan
There's a lot to think about when buying a house
On this page we try to break down some basic concepts about getting a home loan. If this doesn't quite cover what you're looking for, get in touch with us to find out more.
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Pre-approval
A pre-approval is useful for discovering the maximum amount that you can borrow and provides an indication into your price range for properties. A pre-approval is an agreement of finance but there is no property identified yet and it's conditional upon a set of conditions that need to be met first. In any case the pre-approval will be conditional upon the property meeting the lenders criteria, terms and conditions. Common examples of other conditions are as follows.
> The property must be accepted for insurance.
> A registered valuation will be conducted.
> LIM report will need to be produced.
Whatever the conditions may be, they need to be satisfied before the home loan can be finalised for the property and our specialists will guide you through this process. Typically, pre-approvals will last for 90 days before they need to be updated in order to ensure your financial situation has not changed.
The benefit of a pre-approval is it shows that your finance will be approved if all the conditions are met. This may be the edge over other buyers that you need when purchasing a property.
Interest Rates
Each lender offers slightly different features to your loan including different interest rates. For an indication of current interest rates visit interest.co.nz. These rates are an indication and there are a range of factors that can change the actual rate you receive. The type of interest rate offered are either fixed, variable or capped.
Fixed
A fixed interest rate allows you to lock in an interest rate for a period of time, generally up to 5 years for a home loan. After this point the loan will revert back to a variable rate unless a new fixed rate term is organised.
With a fixed rate there will be fees associated with making additional payments or a break fee if you wish to pay the loan in its entirety, exit the loan for another lender or to a variable rate.
A fixed rate benefits you when the variable rate is higher than your fixed rate. When choosing whether to use a fixed rate, the future economic conditions should be considered. If interest rates are likely to increase over a certain period of time, then it may be a good idea to lock in the current rate. Talk with one of our specialists about what is best for you.
The term which the rate is fixed for will influence what the value of the rate is, so longer term rates will be higher than for short term fixed rates. It is common to split the loan across varying fixed rate terms in order to re-fix at different intervals to take advantage of future market conditions.
Capped
A capped rate is a variation of a fixed interest rate but rather than a single rate fixed, there is a maximum limit that the rate cannot go above.
Variable/Floating
A variable rate means that the interest rate that you receive can be changed by the lender. These changes to the variable rate are normally influenced by the OCR which is set by the reserve bank. This means that when choosing a variable rate loan, the economic conditions should be considered.
Changes in the interest rate mean that the total repayments you will make will also change which may make it hard to plan financially. However, a variable rate has no fees for making additional payments or a break cost to consider which can add a level of flexibility.
Combination of Variable and Fixed
Fixed and variable rates both have strengths and weaknesses, so it is possible to split your loan into across both fixed and variable.
Putting the majority of your loan on a fixed rate will allow for stability in payments but with the remaining amount on a variable rate then it is still the possible to make extra payments.
Talk to a specialist today to see what repayment structure will suit you.
Repayment Structue
Table loan
A table loan is the repayment structure you’re probably most familiar with. Repayments are a combination of principal and interest with mostly interest being paid initially and then more principal being paid as time goes on. The repayments are always the same or will have only slight variations if using a variable interest rate which is subject to change.
Positives
> They can help you plan your finances by offering regular payments and having a specific end date for when the loan is fully paid off.
> Allows you to plan for consistent payment amounts, unless using a variable rate
Negatives
> Table loans may not be beneficial if you have an irregular income
Revolving credit loan or line of credit
With this loan structure, essentially you will be operating out of an account which is in overdraft of the loan amount. There will be a credit limit which you can go up to and your income will be paid straight into this account and spending will come out of it. The interest is calculated daily on the amount of overdraft in the account which allows you to potentially decrease the interest you pay.
Positives
> You can repay your home loan sooner if you are strict with your finances
> You can make lump sum repayments but can also withdraw lump sums at any point
> You can save money on interest by putting your savings in the revolving credit account, which is usually higher than the interest earned in a savings account.
Negatives
> You need to be strict with your withdrawals. If you regularly withdraw up to your credit limit then you may pay more interest.
> There can be bank fees associated with using the revolving credit account as a day-to-day account
Offset loan
Offset loans allow you to use your existing accounts to be taken off the balance of the loan in the interest calculation process. This loan structure is only acceptable with a variable rate. This variable interest will only be charged on the loan amount minus the savings you have in linked accounts.
Positives
> You will save interest if you regularly have money in your accounts to offset the loan amount. If you have fully offset the loan, then you will be charged no interest.
Negative
>The only interest rate compatible is variable
>You don’t earn interest on your savings
Reducing loan
This is a principal and interest repayments structure where the principal payment remains the same throughout the term of the loan, but the interest payments slowly decrease over time. This is due to a reducing principal amount that interest is charged on.
Positives
> Over the life of the loan, you will pay less interest compared to a table loan because more principal is being paid in the beginning
> This structure is beneficial if your income will be decreasing over time.
Negatives
> In the short to medium term repayments are very high. If you can continue to make these high payments for a long period of time, then a table loan will allow you to save more.
Interest only
An interest only structure doesn’t pay off any principal for a certain period of time. This is done to free up cash and reduce payments during the interest only period which is very popular with property investors. At the end of the interest only period the structure either switches to a table loan or the entire loan can be repaid.
Positives
> This frees up cash and lowers your regular payments as there is no principal being paid.
Negatives
> You pay interest on the full amount of the loan for the duration of the interest only period because no principal is being paid off.