Applying for a mortgage: what you need to know

Information you need for the lender

When shopping around for a mortgage, you'll need to give potential lenders the following information.

• The amount you've saved toward the price of the house. You may be able to use your KiwiSaver for your deposit or get government help through the First Home Loan scheme.

• The amount you want to borrow. Allow for the lawyer's and valuer's fees, moving costs, immediate renovations that may be required and any loan application fee.

• Your age, occupation and before-tax income. If you're applying to your own bank, it will probably already have access to this information. If not, you will have to provide the lender with some proof, such as bank statements or a letter from your employer.

• Details about any assets you own or debt you owe. Debt includes student loans, car loans and credit card debt.

• Details about regular spending. This includes what you spend on utilities (electricity, phone, internet), groceries, transport, and entertainment costs.

Types of interest rates

Fixed interest rates

• The lender cannot change the interest rate for a certain period, such as 1 year.

• The main advantage of a fixed interest rate is repayment certainty. For a set period, you know exactly what your payments will be. This makes budgeting easier, and you won’t be affected if rates rise.

• The downside is you can’t opt out of your fixed term – unless you pay a break fee, which could negate potential savings. It also means you’ll miss out if interest rates drop.

• Some banks may charge a penalty if you make extra repayments during the fixed-rate period.

Floating interest rates

• The lender can change a floating interest rate (also called a variable or flexible rate) whenever it chooses.

• A floating interest rate offers greater flexibility. If you come into some extra money, such as an inheritance or work bonus, you can put it towards your mortgage without being stung by fees.

• However, you’re at the mercy of interest rate fluctuations – great if they go down, not so great when they go up! This can make budgeting more difficult as your repayments may vary.

Our investigation into interest rates found fixed interest rates are generally going to save you money compared with floating rates.

Ask your bank if you’re eligible for a special interest rate. These rates are lower than the standard fixed rate of the same term. You’ll usually need a deposit of 20% before the bank will give you the lower special rate.

Our independent survey of banking customers shows which banks rank well for overall customer satisfaction when it comes to mortgage interest rates.

Types of mortgages

Table mortgage: Repayments don’t change over the life of the mortgage except when interest rates change. At the beginning, most of each repayment is interest. By the end, you’re mostly paying principal (the amount you borrowed).

You’ll have the discipline of regular payments and a set date when your mortgage will be paid off. You can take a table mortgage with a fixed or floating rate.

Reducing mortgage: On each repayment, you pay the same amount of principal. This reduces the interest each time, so each payment is less than the previous one. But payments start high. This may suit borrowers who expect their income to drop (for example, one partner giving up work in a few years’ time).

Interest-only mortgage: You only pay the interest portion, so the principal doesn’t reduce. But you’ll have to start paying the principal sometime. It can be a risky option if property prices drop and you have to sell.

Revolving credit facility: This works like a large overdraft. Interest applies whenever the account is overdrawn, and the account can be overdrawn up to the maximum of the revolving credit facility at any time.

Revolving credit is flexible, but you need to be disciplined at reducing the overdraft and avoid the temptation to never quite pay down the balance. A revolving credit facility is only available with a floating rate.

Offset mortgage: Uses your savings to reduce the interest you pay and the length of your mortgage. Your savings and loan accounts are linked. Your savings are subtracted from your mortgage, and interest is charged only on the balance. Some banks let you and your family link several accounts to cut down your total debt. Offset mortgages are only available with a floating rate.

Negotiate with your lender

Many lenders are willing to bargain over fees and rates – they often expect it as part of the deal. Whether you're successful in driving a hard bargain depends on your skills and on how hard a bargain you want to push.

• Ask your lender to match a competitor's price as well as lowering or dropping their establishment fee. Interest rates and fees on other accounts are the kind of things you can negotiate.

• Ask about special offers for new customers.

• Make sure you deal with senior staff – the further up the management structure you go, the more authority the staff has to bargain with you.

• If you don't like haggling, get a mortgage broker to do the dirty work for you. For more information, see Mortgage advisers: What you need to know.

• Don't just bargain when you get the mortgage – each time your fixed rate rolls over, bargain hard to get lower fees.

Switching lenders

If you don't like your deal, shop around.

Any bank that's after your business will subsidise your costs. See what your new lender will offer in the way of discounted fees. Some lenders may subsidise or pay any other fees involved in switching.

However, before making a switch, find out whether your existing bank is offering "free" banking for mortgage holders – that is, waiving administration fees. You'll need to consider how much you'll pay in administration fees if you switch to another mortgage lender. Alternatively, you could bargain with the new lender for the same free banking.

Moving your mortgage may also mean moving your bank account, overdraft arrangements and all automatic payments to the new lender.

Also be careful when re-mortgaging through brokers. They may pressure you to change, because they earn upfront fees each time you switch lender. You don't pay these additional fees – the lender does. But changing lenders may be an issue if you want to establish a track record of loyalty.

Switching may be quicker and easier than you think. Find out how to switch banks.

What insurance do you need?

House insurance

You’ll need proof you have house insurance in place before a bank will approve a home loan.

An insurance company will need information about:

• the home (age, condition, what materials it’s made from)

• extra features (including swimming pools, garages and retaining walls)

• the home’s location.

We recommend you shop around (aim to get 3 quotes) and check for exclusions before you buy insurance.

You should also ask the seller who they use as their insurer.

Find out which insurance companies received our People’s Choice award in our house and contents satisfaction survey.

Other insurance

Your lender may insist you have some kind of insurance. It will want to ensure the mortgage will still be paid if you die or are disabled and can’t earn the same income anymore. Your options include mortgage-repayment insurance, term life insurance and income-protection insurance.

Several lenders offer their own mortgage-repayment insurance, but they can't force you to take theirs. Shop around.

For more information about life insurance, read our life insurance buying guide.

You can also work out how much life insurance you might need with our handy life insurance cover calculator.