Experts break down home loan process

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Low interest rates and easing restrictions on home loans may be making property ownership look more attainable for some buyers.

However, real estate experts are advising potential home owners this doesn’t mean mortgages are easy to get.

“If you’ve got your deposit tucked away and you’re seriously looking for somewhere to buy, it’s a good idea to start shopping for a mortgage before you need one,” says Real Estate Authority chief executive Kevin Lampen-Smith.

“The home-buying process can move fast, and it makes things much easier if you’ve already got a lender on side. This is known as pre-approval and it can take a lot of the uncertainty out of knowing what you can afford.”

First up, a lender will want to know how much deposit you have, says Kevin.

Most lenders expect first home buyers to have at least 20 per cent of the amount they want to borrow.

The average New Zealand house price is currently at $550,000, which means potential home owners will need to show proof of savings of at least $110,000 if you want to buy a property at that price.

They’ll also ask you how much you earn and how much you spend, along with details about any other debts or loans you might have, he says.

“While the bank or financial institution needs to make sure you’re a safe risk, there are two sides to this relationship.

“It’s important that you feel confident about what you’re signing up to before you commit.”

He says that your first question – after how much they will let you borrow, and what the interest rate will be – should be about fees: what will you have to pay for taking out this mortgage?

For example, will you have to pay a low equity fee if you have less than 20 per cent deposit? Will there be any penalties if you pay off a chunk of the mortgage early? Can they waive your normal account fees if you take out a mortgage?

Sometimes a lender may want to loan you more than you’re comfortable paying out of your weekly income, says Kevin.

“Remember that you must be able to afford the repayments and you don’t have to borrow up to your highest limits if you don’t want to.

“Ask what the best way is to structure the mortgage based on your circumstances, and whether this is flexible if things change.”

For example, are you better off with a table loan (where you sign up to make regular payments for a set term up to 30 years), or will you be able to pay it off faster if you have a revolving credit loan or offset mortgage? Also, will you still be able to afford the mortgage payments if the interest rate goes up? If the property needs a lot of renovation work to become liveable, could an interest-only loan work?

Kevin says the lender or a mortgage broker should be able to explain all the pros and cons of these different loan types, including how they’ll affect your payments and the total amount you’ll have to pay.

Most lenders will require you to have insurance for a property when taking out a mortgage. You may be encouraged to get this insurance through the lender or sign up to any number of other insurance policies, such as mortgage protection, income protection and life insurance.

“Look at these carefully,” he says. “Don’t feel pressured to sign up but do think about how you’ll manage if things change for you in the future. Life changes don’t respect the terms of a mortgage and you might find yourself wanting or needing to sell the house and buy another one. Ask the lender if the mortgage (and its terms and conditions) is portable to another property.”

Some lenders offer sweeteners to entice people to sign up with them. Examine the conditions of these deals carefully. Don’t let the short-term ‘carrot’ of a $200 gift voucher blind you to a higher interest rate.

“Signing up to a home loan is like entering any long-term partnership,” says Kevin. “Do your homework before you commit and you’ll be a lot better off in the long run.”

For independent guidance and information on buying or selling, check out


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