Step 1: Have a casual chat with your lender or broker
Getting your head around the home loan landscape is easier if you have an initial chat with a bank lender or a mortgage broker. They won’t mind a ‘tyre kick’ session – over the phone or in person – because it gives them a chance to show off their knowledge. Be honest about where you’re at in the property buying process, emphasising that you’re not ready to complete a mortgage application yet. Good preparation for this meeting is a list of questions, such as:
- Roughly, how much can I borrow? (have approximate income and expenditure figures with you)
- How long does it take to get loan pre-approval?
- How long does it take to get a confirmed ‘yes’ or ‘no’ for a mortgage application?
- What’s the best interest rate going right now?
- Are you offering any special incentives for new customers?
- If I borrow from a different bank to the one I’m using now, will I have to move all my other banking there?
Step 2: Play with some calculators
Budget planner calculator
The budget planner calculator can give you a clear picture of money in and money out. It’s excellent preparation for the loan application process, because lenders need to see that you can afford mortgage repayments. To be brutally honest with yourself, you can analyse the past six months of your spending and feed that into the budget planning calculator. Often, this reveals areas of over-spending (entertainment, clothes and food are the usual suspects). When you can recognise the difference between essential and non-essential expenses, you can pull together a tighter budget.
Borrowing power calculator
Mortgage repayments calculator
The mortgage repayments calculator lets you see how much you have to pay every fortnight or month. You can enter house price, deposit amount, loan term, interest rate and repayment frequency. It’s always interesting to modify these figures, to see a variety of repayment possibilities. For example:
- A $900,000 property with a $180,000 deposit over 25 years at a two-year fixed rate of 2.69% will cost $3,300 a month.
- When you change the term to 15 years and increase the interest rate to a five-year fixed rate of 2.99%, the monthly repayment is $4,969 – but you’re paying off the loan 10 years earlier.
- And if you bought a cheaper house ($850,000) and left all the other things the same (15 year term, 2.99% rate), the monthly repayments would be $4,624.
Step 3: Get your deposit organised
Gathering up a lump sum that will become your 20% (or more) deposit can involve several sources of cash. Getting your deposit together is different for first-home buyers, compared to someone who’s moving on from an existing home. Here’s what we mean:
- If you’re buying your first home, the deposit is likely to come from your savings, KiwiSaver and, maybe, a boost from the ‘bank of mum and dad’. KiwiSaver lets you make a ‘first home withdrawal’ if you’ve been a member for three years or more. You can take out everything except $1,000 of your savings. You might also qualify for a KiwiSaver First Home Grant of up to $10,000. Your parents can help you out with a cash gift, by guaranteeing your mortgage or by borrowing against their own home.
- If you’re buying a home that isn’t your first, your deposit money will probably be in the form of equity (money that’s yours after you’ve repaid any loans) from the sale of your existing home. The ‘bank of mum and dad’ could also contribute to your deposit.
- If you’re buying an investment property, you’ll have to stump up with a 40% deposit to get the loan you need, however you may be able to use equity in another property you own as your deposit.
Step 4: Choose a lender
You might already have a lender in mind. Your main bank, for example. Or you could be open to good offers. Either way, at some stage you need to do your research and choose a lender.
A quick way to get your head around this challenge is to find a mortgage broker who deals with lots of different lenders, including non-bank lenders. Mortgage brokers make their money from the banks, not you, so don’t be shy about introducing yourself.
Alternatively, there’s nothing to stop you from going to a few of the major banks to see who’s the keenest to get your business. For starters, compare their rates online. Then draw up a shortlist and arrange some meetings.
If you have a bad credit history or can’t easily prove your income, working with a mortgage broker could be the best way forward. There are non-bank lenders who may be willing to give you a mortgage, however you can expect to pay more interest.
Step 5: Get pre-approval before you make an offer
Shopping for a property is a whole lot easier if you’re confident of your financial position, including how much you can borrow. There’s nothing worse than falling in love with a home that you probably can’t afford. Another worst-case scenario is going to an auction and getting carried away with bidding, resulting in an unconditional sale that you can’t really afford.
Before you commit hours of time to sifting through property listings online, it’s a good idea to get ‘pre-approval’ from the lender you’re most likely to go with.
Pre-approval is an agreement from the bank that you can borrow a specific amount, but only if the property you purchase meets its home loan criteria and you continue to meet the income/expenditure requirements. Pre-approvals are valid for a set amount of time, so always ask when it will expire.
Step 6: Complete a mortgage application
Whether you complete a formal mortgage application before or after you agree to buy a house depends on the type of sale.
- For an auction: Auctions are ‘unconditional’, so you need to confirm your finances before you start bidding. If you win the auction, you’ll need to have a purchase deposit ready (usually 10% of the price). Your lender will want to know all about the property before your application for a loan is approved.
- For other types of sale (tender, by negotiation): Whether you apply for a mortgage before or after making an offer depends on whether your offer is unconditional or conditional. To make an unconditional offer, you need to be totally confident you can get the finance you need. For a conditional offer, you can apply for your mortgage once your offer has been accepted by the vendor.
To be sure you’re doing the right thing, ask your lender or mortgage broker for advice. They’ll know your personal circumstances and will be able to make a recommendation about when to complete a mortgage application.
Mortgage approval can take two or three weeks. Always ask your lender when you’re likely to hear the news. After that, getting the loan ready for settlement day could take another three weeks at least. When the real estate market is busy, these times could stretch out even further. Moral of the story – don’t delay applying for a mortgage!
Step 7: Work out your mortgage structure
Assuming your mortgage application is approved, it’s time to figure out a structure for your borrowing. To do this, you need to know some stuff. Here are the basics:
- Interest rate: This can either be fixed or floating. Fixed means the rate stays the same for an agreed time (ranging from six months to five years); floating, aka variable, goes up and down with the market.
- Mortgage term: This is the length of time you have to repay the loan in full. Usually, it’s between 1 and 30 years.
- Repayment structure: Mortgage repayments are made up of principal and interest. With a typical table mortgage, the ratio between these two adjusts over time. At first, repayments mostly pay interest. Later, you’ll start to pay off more and more principal.
- Offsetting: Using money in other bank accounts to reduce your mortgage balance, so that you pay less interest.
- Revolving credit: Having an all-in-one bank account with a large overdraft facility. You draw down the money you need to buy a house, then move funds in and out whenever you choose, provided you don’t exceed your borrowing limit. The interest is calculated daily, so you can use your income to reduce the loan balance and save on interest.
It’s quite common to divide your borrowing between two types of mortgage. For example, you could have some of your borrowing on a floating interest rate and some of it on a fixed interest rate. This gives you the flexibility to pay lump sums into the floating mortgage when you have spare money. Or you could have two fixed rate mortgages – one on two-year fixed and one on five-year fixed. Before you commit to this kind of strategy, it’s best to check your thinking with a financial adviser – preferably one that won’t benefit from your decision!
Step 8: Get all your ducks in a row
Settlement day is both exciting and stressful. If your property purchase is part of a chain reaction, where several homes will be changing hands in the same day, you need to make sure nothing’s going to hinder the process. Your lawyer doing the conveyancing must know where the money’s coming from to complete the sale. Your bank has to know where to put the money. Relevant documentation needs to be checked and signed.
Sometimes it’s smart to move the day after settlement day, because often you won’t get the keys to the property until all the transactions have taken place.
Tips and techniques for getting a mortgage
- Remember that a home loan doesn’t have to come from a major bank. There are plenty of ‘non-bank lenders’, including building societies, private finance companies, insurance companies, trustee companies and credit unions.
- Never be afraid of asking a lender to do you a deal. If it will secure your business, they’ll sometimes offer a lower-than-advertised interest rate or give you a lump sum towards your conveyancing bills.
- If all your business is with one bank, they could reduce your fees. Some banks even eliminate all transaction fees if you have a mortgage with them.
- If you feel like you’ve been treated badly by a bank or lender, you can go to the Banking Ombudsman for justice.
- Working with a mortgage broker is a way to save lots of time. You could also potentially save money, because good brokers know about the best deals. But be aware that you might get charged a fee if you decide not to borrow through them.
- If a lender offers you a 95% loan, instead of the usual 80%, think hard before you accept. That’s a lot of money to pay back and your circumstances could change in the future.
- Revolving credit loans can be a challenge for some people, because there’s always the temptation to spend the money you have available. Remember that it’s a home loan, not a stash of cash.