Disclaimer:
The information on this website is for general guidance only and does not constitute financial or investment advice. Always do your own research and seek personalised advice from a qualified financial adviser or mortgage adviser before making financial decisions. All investments carry risk and past performance is not indicative of future results.
Key Takeaways
- Choose mortgage types based on certainty versus flexibility.
- Prepare key documents before applying to avoid delays.
- Assess affordability with a clear income and expense budget.
- Consider combining mortgage structures for balance.
- Seek advice to match options to your goals.
Buying your first home in New Zealand is an exciting achievement, yet navigating the world of mortgages can feel intimidating. With various mortgage types, fluctuating interest rates, and extensive paperwork, it's easy to feel overwhelmed. But fear not!
By understanding the basics and preparing adequately, securing your mortgage can be a smooth and stress-free journey. This comprehensive guide will take you step-by-step through the entire process - from exploring mortgage options to submitting your final application - so you can confidently secure your first home.
Understanding Mortgage Types in New Zealand
Choosing the right mortgage is crucial. It not only impacts your repayments but could potentially save you thousands of dollars in the long run. Here's a clear breakdown of the common mortgage types available to first home buyers:
Fixed-Rate Mortgages
A fixed-rate mortgage offers repayment certainty. The interest rate stays fixed for a chosen period (usually between 6 months to 5 years), providing predictable repayments and easing budgeting stress. This option is highly suitable for first home buyers who prefer stability and predictability in their repayments.
Variable-Rate Mortgages
Variable-rate mortgages have interest rates that fluctuate with the market, often linked to New Zealand's Official Cash Rate (OCR). This means repayments can decrease if rates drop - but they can also increase, potentially straining your budget if rates rise significantly.
Interest-Only Mortgages
Typically reserved for investment properties, construction phases, or financial hardship scenarios, interest-only mortgages require repayments of only the interest portion, not the principal, for a specified period. While this reduces monthly repayments, you won't be reducing your loan amount during this time.
Revolving Credit Mortgages
Revolving credit mortgages function similarly to overdrafts, offering flexibility in how you borrow and repay. Interest is charged only on the amount used. If you manage your finances well, this can significantly accelerate mortgage repayments.
Offset Mortgages
Offset mortgages link your savings account directly to your home loan, using your savings balance to offset the mortgage principal. This reduces the interest payable, providing a flexible way to save on interest while maintaining access to your savings.
Pro Tip: Combining mortgage types - such as a large portion on fixed-rate and a smaller portion on revolving credit - can give you both certainty and flexibility.
Essential Documents for Mortgage Applications
Preparation is key to a successful mortgage application. Gathering the necessary documentation ahead of time can streamline the application process significantly.
Essential Documents Include:
- Proof of Identity: Passport or driver's license
- Proof of Income: Recent payslips, employment contracts, or employer letters
- Household Expenses Breakdown: Regular expenses such as groceries, utilities, subscriptions, and leisure spending
- Asset Inventory: Documentation for assets like vehicles or investments
- Outstanding Debts: Statements detailing existing loans, credit card balances, and other financial commitments
- Deposit Verification: Evidence of your deposit source (savings, KiwiSaver, or gifted funds)
Having these documents prepared can speed up the mortgage approval process significantly.
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Assessing Your Financial Health and Home Loan Affordability
Understanding your financial position before applying for a mortgage is crucial. Here's how you can accurately assess your affordability:
Income and Expense Review
Create a detailed budget of your income versus your expenses. This helps you understand how much disposable income is available for mortgage repayments.
Pro Tip: Make use of Pocketsmith to track your actual expenses or use Sorted's Budget Planner to create a budget.
Deposit and Savings
Banks usually require a deposit of 10% to 20%. The larger your deposit, the better mortgage terms you are likely to receive.
Learn More: How much Deposit do I need as a First Home Buyer?
Debt-to-Income Ratio (DTI)
Your DTI ratio measures your total debt against your total income. The Reserve Bank introduced DTIs in 2024 as a way of assessing a borrower's ability to meet their debt repayments.
Lower ratios (more income or less debt) can boost your borrowing potential. Consider paying down debts before applying.
Credit Score
Your credit score reflects your financial reliability and provides evidence to the Bank of a positive track record of debt repayment. Maintain a good score by paying bills on time, avoiding defaults and managing debts wisely. Free credit checks are available through Centrix, Equifax, and Illion.
Learn More: The Impact of Credit Scores on Mortgage Approval
Mortgage Pre-Approval
Obtaining a pre-approval is highly recommended. It sets clear budget parameters, making property searches targeted and efficient.
Bank or Mortgage Broker?
With a mortgage pre-approval, you have options. You can go directly to a bank. This can usually be done with a bank lender at a branch, over the phone or online.
Alternatively, you can use a Mortgage Adviser that are usually free and can save you a lot of time and money. Not all banks have the same lending criteria and whilst one bank may decline your loan another may approve it. Having a mortgage broker working for you means that you only need to complete one application and then leave your broker to shop around the banks to get the best home loan pre-approval to suit your needs.
Learn More: Should I Use a Mortgage Adviser or Go Direct to the Bank?
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