12aug mortgages mortgages


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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Shopping for mortgages

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Making savings

Saving on your mortgage is based on 2 facts.

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Jargon buster

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.

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.

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

The amount you borrow.

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).

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.

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.

The Banking Ombudsman

The Banking Ombudsman deals with complaints about banking services provided by banks that are members of the Banking Ombudsman Scheme. All major trading banks belong to the scheme. The services of the Banking Ombudsman are free of charge. Complaints can be made in writing or by phone (0800 805 950).

If you have a complaint, you should first try to sort it out with your bank using its internal complaints procedures. However, you can ask the Banking Ombudsman for advice from the moment you first have a problem with your bank.

Complaints the Ombudsman can deal with
You can take a complaint to the Banking Ombudsman if:

  • You have not heard from the bank 3 months after completing the bank's complaint form; or
  • Its response has not been satisfactory; or
  • Deadlock has been reached. You must make your complaint to the Banking Ombudsman within 2 months of the your bank notifying you that deadlock has been reached.

The Banking Ombudsman has the power to make an award against a bank of up to $200,000, and to compensate for inconvenience up to $9000.

The Banking Ombudsman's decision is binding on the bank, but you are free to accept or reject the decision.

Complaints the Ombudsman cannot deal with
The Banking Ombudsman cannot handle complaints which are:

  • About a bank's interest rate policies.
  • About the amount of a bank's standard fees and charges.
  • About a bank's commercial judgement.
  • For claims more than $200,000.

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.