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12aug mortgages mortgages default


We explore the different types of mortgages, interest rate options and what to do if you're having trouble paying off your mortgage.

Types of mortgage

There are 4 basic types of mortgage.

Revolving-credit facility: This operates like a large overdraft, secured by the mortgage over your home. Interest applies whenever the account is overdrawn – and the account can be overdrawn at any time up to the maximum of the mortgage.

Revolving credit is flexible and works well for disciplined borrowers. But offsetting the flexibility is the temptation for some people to never quite pay down the balance. If you want the flexibility of a revolving-credit mortgage without the temptation, ask your lender or broker about your options. Some possibilities are a revolving-credit mortgage with a reducing balance (where the credit limit available reduces over time), or a flexible table mortgage that allows you to "redraw" some of what you have repaid.

Table mortgage: This is the most common form. The repayments do not alter over the life of the mortgage. At the beginning, most of each repayment is interest, by the end you're mostly repaying principal.

Reducing mortgage: On each repayment, you repay the same amount of principal. This reduces the interest charge each time, so each repayment is less than the previous one.

Interest-only mortgages: When you pay interest only, monthly repayments are financially more digestible. But you'll have to start paying off the mortgage at some point. And, unless house prices head upwards, you're not building up equity in your home. The risk is that if property prices fall, your property will be worth less than what you paid for it. If you have to sell, you could end up deeper in debt.

NB: For clarity, these descriptions assume interest rates do not change.

Interest rate options

There are 2 main types of interest-rate (and 2 hybrids).

Floating: The lender can change the interest rate on the mortgage whenever they choose. A floating-rate mortgage offers you wide scope to change your plans too. You can make extra repayments, increase or decrease repayments (subject to some limits), or repay the mortgage early, without copping penalty fees.

Fixed: The lender cannot change the interest rate for a certain period, such as a year. This gives you certainty, and floating rates are usually higher than fixed rates prevailing at the same time. This explains why fixed-rate mortgages are very popular these days. But with a fixed-rate mortgage you will often face a penalty if you want to change the conditions.

Capped rate: A compromise is a capped rate. If floating rates rise above the cap, the cap doesn't follow, but if floating rates drop below the cap, the capped rate drops too.

Discounted rate: Another alternative to a fixed-rate deal is to have a discounted rate. This guarantees you stay below the floating rate – whichever way it moves – for the length of the discount, provided you have all of your loan in it.

The best interest rate?

Fixed and floating interest rates each have pros and cons.

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Mortgage providers

Just about everyone, it seems, offers mortgages these days. So shop around.


Banks continue to be the main lenders, and are a simple and convenient way to arrange finance. Just phone, or make an appointment to see someone at your local branch. Some banks offer mobile lending managers, who will visit you. Another benefit of using a bank for your mortgage is that you can complain to the Banking Ombudsman if anything goes wrong and the bank doesn't sort it out.

Banks compete vigorously for mortgage business, and will often negotiate. You may be able to waive the application fee, get a low initial interest rate, get fee discounts on your other accounts, or join a rewards scheme. If you find a better deal at another bank, challenge yours to match or better it.

Non-bank options

Other sources of mortgage finance should not be overlooked. These include non-branch banks, insurance companies, building societies and credit unions. Some of these lenders are covered by the Insurance and Savings Ombudsman.

Before going with a non-mainstream lender make sure you understand its financial situation or you may find yourself dragged into its business difficulties. The banks, for instance, are required to tell you their financial strength rating (or that they have not obtained one) – make sure any non-bank lenders tell you the same.

Mortgage brokers

It can pay to have an expert check out the deals for you and bargain on your behalf. Mortgage brokers accredited to the NZ Mortgage Brokers Association (NZMBA) are required to represent at least 6 lenders and to be independent. The service is usually free to customers. Brokers make their money from upfront fees that the lenders pay them for your business, and from on-going "trailer" commissions throughout the life of your mortgage.

A good broker can cut through the fine print to find a deal that suits you. For example paying off your mortgage quickly may be a top priority, and so you'll want a mix of fixed and floating rates. Brokers also have access to non-bank lenders and smaller building societies that you've never heard of or considered using.

Shopping for mortgages

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Doing your mortgage ground-work

Making savings

Saving on your mortgage is based on 2 facts.

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Jargon buster

Establishment fee

Also called the "application fee", this is the fee to set up the mortgage. The establishment fee may be set at a minimum or maximum dollar amount, or some percentage of the amount borrowed. It is often negotiable.

Lending limit

The maximum percentage of the house valuation the lender is generally prepared to lend up to. In some circumstances, lenders may lend a higher percentage but could charge extra for this.


Strictly speaking, this is a legal document that secures property for a loan. But, like most people, we also use the term to mean a loan to buy a house. The "mortgagee" is the lender and the "mortgagor" is you, the borrower.

Mortgagee sale

If you cannot repay the mortgage, as a last resort the lender sells the house to get its money.


The amount you borrow.

Reducing mortgage

Each repayment comprises the same amount of principal. That means the interest charge is less each time, so each repayment is less than the previous one (assuming interest rates don't change).

Revolving-credit facility

Essentially a large overdraft secured by your house, which you access using a cheque account or credit card. The interest rates on revolving-credit facilities are usually around the same as normal floating rates.

Table mortgage

The most common form of mortgage. Unless interest rates change, the repayments do not alter over the life of the mortgage. But the interest and principal components of each repayment do change. At first, most of each repayment is interest - by the end, most is principal.

Repayment calculator

Enter your loan details to calculate your regular repayments and the total interest you'll pay over the term of the loan. (The calculations are for a standard table mortgage.)

Big mortgage mistakes

Traps to watch out for.

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Making a complaint

If you have a problem with your bank, there are 3 main steps you should take:

  • Ask to speak to the branch manager about your problem.
  • If they can't sort it out, ask to go through the bank's formal complaints process.
  • If that still leaves you dissatisfied, contact the Banking Ombudsman.

Mortgagee sales

If you can't repay your mortgage, as a last resort the lender has the right to sell the house to get its money.

Most lenders will want to help you find other ways to meet your obligations before selling the property.

If you're struggling with your finances, the best thing to do is contact your lender before you get behind on your payments. If you're not already behind in your payments you're entitled to ask the lender for a change to the terms of your contract to help you meet your obligations. This could be getting a mortgage holiday or decreasing the amount of your repayments while increasing the length of your loan.

If you're already behind on your repayments contact the lender and be upfront and honest. Ask if it is prepared to come to an arrangement to help you meet your obligations. Do your best to meet ongoing payments, return phone calls and keep a record of who you talk to and when.

Letter of demand: This is the first formal step in the debt recovery process. It advises you of the amount you owe in arrears and demands payment by a certain date.

  • Try to pay the arrears and your ongoing loan repayments.
  • Talk to the lender. If it's not prepared to enter into a repayment programme, you may want to consult a lawyer for advice about your options.

Property Law Act (PLA) notice: If you don't pay the arrears advised in the letter of demand, the lender may issue a PLA notice. This states you are in default under your mortgage because you have failed to pay the amount in the letter of demand. The PLA notice tells you the amount you need to pay by a certain date (a minimum of 20 working days after the PLA notice is issued).

  • Contact your lender if you haven't already done so, and ask whether you can enter into a repayment programme.
  • Consult a lawyer for advice.

If you don't pay the full amount owed in the PLA notice, including costs, the lender has the right to sell your property.

Rent or buy?

Use our calculator to compare the financial implications of buying and renting over 20 years.

  • The calculations are based on the assumption that, if you rent, you invest the money you would otherwise have spent on house buying - the deposit, insurance, ongoing mortgage payments (minus rent) etc.
  • While we've made every effort to keep the assumptions underlying our model reasonable, it's still just informed guesswork. You can play around with the figures to see what impact changing them has.
    Note: Real interest rate = the interest rate on your savings, after tax, less the inflation rate.

Should you rent or buy?

As well as potential increases in the real value of your house, home ownership has other benefits. You can use your house as security to borrow more money. There's also the pride of owning your place, which you can alter as you please, knowing that no landlord can evict you. Moreover, repaying the home loan can be viewed as a form of compulsory saving.

But there are disadvantages with home ownership. It costs a great deal of money to buy and run a house. You'll need a deposit, and have to find money for mortgage repayments, insurance, maintenance, rates, etc. If you're renting, you could invest that money (less your rent). Also, if you want to move, there's the hassle and cost of selling your house. If you live in a flat, you can just give notice and leave.

Having all your money invested in your home is common in New Zealand, but does run the risk of lack of investment diversity - if house prices in your area fall, you will have lost money.