This blog has been republished from settled.govt.nz.
Learn what you need to know about how mortgages are calculated and how much you can borrow when buying a home.
So you’ve been sacrificing that extra latte each week, your clothes are all ‘vintage’ and you haven’t upgraded your mobile phone in 10 years. Is it time to buy a house with all those extra savings? Check out our quick and basic mortgage calculator to see how much you could afford to repay each week.
How are mortgage repayments calculated?
How much can I borrow?
How much you can borrow depends on several things. A lender will want to be sure that you can keep up with repaying a loan, so they’ll look at your current income (and expenses) before deciding how much they will lend you. They’ll also want to know about the property you’re keen to buy so they can assess whether it’s worth the money you want to borrow for it.
What are the main types of mortgages?
There are four main types of mortgages used by New Zealand home buyers:
- Table loans are the most common. With a table loan, most of the early repayments go towards paying off the interest on the loan, and the later payments go on the principal (the initial amount borrowed).
- Revolving credit loans operate like an overdraft (where you can use or spend money you don’t have, up to an agreed limit with the lender). This means that any income you have goes into the account, which reduces the amount of interest you pay.
- Reducing loans require you to pay the same amount off the principal each time, but the amount of interest you pay decreases over time.
- Interest-only mortgages operate in the opposite way to a reducing loan, because you only pay the interest on the loan, rather than the principal, for an agreed period.
What do I need to know about interest rates?
There are two main types of interest rates: fixed and floating. You can do one or the other – or split your loan between the two.
Fixed interest rate loans
You can fix the interest rate you pay for a period of six months to five years. At the end of the term, you can choose to re-fix again for a new term or move to a floating rate.
- You know exactly how much each repayment will be over the term.
- Lenders often compete with fixed rate specials.
- You can lock in lower rates if market interest rates are rising.
- Fixed rates often have limits on how much you can increase repayments or make extra payments without paying charges.
- If interest rates go down, you won’t be able to benefit from the decrease.
- If you choose to sell your property and/or break a fixed loan you may be charged a ‘break fee’.
Floating rate (or variable rate)
With a floating rate mortgage, the interest charged on your loan can go up or down as the market interest rates change – and your repayment amounts will increase or decrease accordingly.
- You have more flexibility to make changes without penalty, such as paying off the loan early or changing the loan term.
- It’s easier to consolidate other debt into floating rate loans by borrowing more and adding it on your mortgage.
- If interest rates go down, you can benefit from lower repayment amounts.
- Floating rates are often higher than fixed rates.
- When rates go up the repayments also go up – which could be hard on your budget.
How can I pay my mortgage off quickly?
Even increasing repayments by the equivalent of $25 a week may save thousands of dollars in interest – and take months or even years off your mortgage! Sorted.org.nz offers top mortgage strategies and excellent tips for managing your mortgage.
What happens if interest rates rise?
While interest rates have remained low over the last few years, it won’t stay that way forever. Consider the worst case scenario as well as current interest rates when using the mortgage calculator, to ensure you’ll still be able to afford your mortgage repayments, even if interest rates rise. Once you get your foot in the door, you’ll want to keep it there!