What you need to ask your lender
Q. We’re hoping to buy our first home in the new year and people keep telling us that it’s a really good time to get a mortgage because interest rates are low. Apart from my student loan I’ve never really borrowed money before and I’m not sure how all this mortgage stuff works. My partner is from overseas so he’s not very clued up on the New Zealand system and we’re both a bit freaked out at the thought of signing up to 25 years of debt! I feel like I’ve done heaps of research about what to look out for when you’re buying a house, but when it comes to banks, I’m a bit lost. What do we need to look out for when we’re shopping for a mortgage, and who can help us?
A. Money is the number one thing on most people’s minds when it comes to buying a property. Buying a home is the biggest financial decision most people will ever make, and it can be a stressful time whether you have money to burn or not.
Since most of us fall in the latter category, much of the information around money when you’re buying a house is geared towards preparing you for questions that financial institutions will ask you. The first thing a financial institution is likely to ask you is how much deposit you have. Most lenders expect first-home buyers to have at least 20 per cent of the amount they want to borrow.
With the average New Zealand house price now at $550,000, that means you’ll need to show that you’ve saved $110,000 if you want to buy a property at that price. They’ll also ask you how much you earn and how much you spend, along with details about any other debts or loans you might have.
While the bank needs to make sure you’re a safe risk, there are two sides to this relationship. It’s important that you feel confident about what you’re signing up to before you commit. If you’ve got your deposit tucked away and you’re seriously looking for somewhere to buy, it’s a good idea to start shopping for a mortgage before you need one. The homebuying process can move fast, and it makes things much easier if you’ve already got a lender on side. This is known as pre-approval and it can take a lot of the uncertainty out of knowing what you can afford.
Your first question – after how much they will let you borrow, and what the interest rate will be – should be about fees: what will you have to pay for taking out this mortgage? For example, will you have to pay a low-equity fee if you have less than 20 per cent deposit? Will there be any penalties if you pay off a chunk of the mortgage early? Can they waive your normal account fees if you take out a mortgage?
Sometimes a lender may want to loan you more than you’re comfortable paying out of your weekly income. Remember that you must be able to afford the repayments and you don’t have to borrow up to your highest limits if you don’t want to. Ask what the best way is to structure the mortgage based on your circumstances, and whether this is flexible if things change. For example, are you better off with a table loan (where you sign up to make regular payments for a set term up to 30 years), or will you be able to pay it off faster if you have a revolving credit loan or offset mortgage? Also, will you still be able to afford the mortgage payments if the interest rate goes up? If the property needs a lot of renovation work to become liveable, could an interest-only loan work?
The lender or a mortgage broker should be able to explain all the pros and cons of these different loan types, including how they’ll affect your payments and the total amount you’ll have to pay.
Most lenders will require you to have insurance for a property when taking out a mortgage. You may be encouraged to get this insurance through the lender or sign up to any number of other insurance policies, such as mortgage protection, income protection and life insurance. Look at these carefully. Don’t feel pressured to sign up but do think about how you’ll manage if things change for you in the future.
Life changes don’t respect the terms of a mortgage and you might find yourself wanting or needing to sell the house and buy another one. Ask the lender if the mortgage (and its terms and conditions) is portable to another property.
Some lenders offer sweeteners to entice people to sign up with them. Examine the conditions of these deals carefully. Don’t let the shortterm ‘‘carrot’’ of a $200 gift voucher blind you to a higher interest rate.
Signing up to a home loan is like entering any long-term partnership. Do your homework before you commit and you’ll be a lot better off in the long run.
Some lenders offer sweeteners – examine these deals carefully.
Kevin Lampen-Smith is the chief executive of the Real Estate Authority (REA), the independent government agency that regulates the New Zealand real estate industry. Send questions about buying or selling property to susan.edmunds@stuff.co.nz. For independent guidance and information on buying or selling, check out settled.govt.nz.