Everyone knows that you can borrow money from the bank to buy a house. But there are lots of other places that you can go if you want to work with a financial institution.
Everyone knows that you can borrow money from the bank to buy a house. But there are lots of other places that you can go if you want to work with a financial institution.
This article will walk you through what grants and lenders exist and the pros and cons of each.
There are actually 15 banks from which you can get a mortgage from in New Zealand. Most get their mortgage from ANZ, ASB, BNZ, Westpac and Kiwibank. There is also Heartland, Co-operative, SBS, Kookmin, Bank of Baroda, Bank of China, China Construction Bank, HSBC, TSB and ICBC.
Banks typically offer five different types of loans:
Table Home Loans is what most people choose. It has a regular structure and terms of up to 30 years. You make both interest and principal payments at regular intervals. These are typically weekly, fortnightly or monthly. When you start, your payments mostly cover the interest. Over time, you cover more and more of your principal.
The advantage of table home loans is that it is easy to understand when you will pay off your loan and you can budget for your repayments. But the advantages may also be disadvantages for some people. For example, if you are a freelancer or contractor and have lumpy income, it can be hard to keep up with the payments. You can also be charged for over-payments or early repayments.
Before you sign up to a table home loan, you should consider your financial position. If you want more cash on hand in the short term, you might want to have a 30 year term. But the sacrifice you will have to make is that you will pay more interest.
Table home loans are best suited for those in stable jobs and typically first home buyers.
Case study: Rangi and Roma are in their 50s. They are buying their forever home. They have a lot of cash on hand and decide on a reducing balance home loan, especially as they are looking to retire when they turn 65.
These types of loans are hardly advertised let alone offered by banks. Unlike a table home loan, a reducing balance home loan structure is where you pay a set amount of the principal over the lifetime of the loan. As you pay down the principal, the amount of interest that you pay decreases.
This type of loan is best suited for those that don’t like paying so much interest and/or will have decreasing income in the future (think those in their 50s and 60s). The flipside to this is that you will have very high repayments at the start of the loan.
From a cash perspective, a reducing balance home loan is the most cash sucking, but it does mean you pay less interest overall. It can be hard to afford if you don’t have a high household income.
Case study: Amy and Noah have been paying off their home loan diligently for 15 years. They are also very good with money. They want to buy a new home and decide on a revolving credit home loan to give themselves a bit more flexibility.
If you or your family have equity in a home, then you may want to consider a revolving credit home loan. They work a bit like an overdraft. The way that it works is that you get access to your home’s equity and can spend it however you want. And because a revolving credit loan is a line of credit, you pay interest only on the funds you withdraw. You can also repay as much or as little as you want each month. It does work in your advantage to keep as much as possible of your income in the same account to minimise interest.
This is a great way to put a deposit on another home. And you can also be a bit cheeky. If you time it right with your income and outgoings, you can reduce your interest and pay back the loan faster. You can also make lump sum repayments whenever you want.
The trouble with this type of home loan however is that it requires strong money management. Remember the greater goal is to reach financial freedom. Revolving credit home loans can look like free money but it really isn’t.
Case study: Amy and Noah have been paying off their home loan diligently for 15 years. They are also very good with money. They want to buy a new home and decide on a revolving credit home loan to give themselves a bit more flexibility.
An offset mortgage is a cheat code if you are good with money. It links your mortgage to your everyday cash savings account. The total sum of your savings is deducted from your mortgage balance. This reduces your monthly interest cost.
This can help you save money over the long term, especially if you have a lot of savings. So while you will not be paying down your interest, you will be paying less interest. The other great thing about an offset mortgage is that you will still have access to your savings if you need it.
Using an offset mortgage should only be used in a very specific circumstance though. You can only use it with a floating interest rate and you are likely to be offered an interest above the 2-year home loan rate. This means its only really financially worth it if the interest rates are low and you have a considerable amount of savings. Also, if you offset your mortgage against your savings, you won’t earn interest on those savings.
Case study: Nicolla and Toby are big savers. They have been paying off their table mortgage for a while. They have decided to use an offset mortgage so their savings can be used to lower the interest that they pay.
An interest only home loan is exactly what it sounds like. You don’t pay any principal. You only pay the interest. The interest is typically floating. And as per the contract you can work with the bank to decide on the length of term of the loan.
This is great if you are buying an investment property and need cash in hand. It also means you don’t need to pay down any principal if you are looking to flick a property off in the case of the price of property going up.
Interest only home loans aren’t a great idea unless you know that you will be looking to sell the home and you need cash to cover things like renovations. It can also leave you caught out if you change your mind and want to go for a table loan. You will need to be in a strong financial position.
Case study: Vivek and Priya are looking to buy their second property and rent it out. Their plan is to sell the house in 20 years and make money off the capital gains. They decide on an interest only home loan and the money from the rent will be used to pay with it.
A building society is defined by the Companies Office as “a mutual organisation (owned by its members) that offers financial services to its members. This can be in the term of deposits, investments or loans. There are three large building societies in New Zealand:
Because building societies are owned by its members, their profits are shared with its members. This typically means that they also have autonomy on tailoring lending and investments; and making quicker decisions than the banks.
Mara and Mohit belong to Nelson Building Society. Nelson Building Company has created a bespoke mortgage solution for Mara and Mohit and get their home loan pre-approval offer sorted in a few hours.
A credit union is similar to a building society. It is owned by its members and is set up to provide savings and loan facilities for its members. The difference is that its members must have a common bond. This can be geographical or being employed by the same employer.
If you are buying your first home and have been contributing to your KiwiSaver for at least three years, you might be eligible for a First Home Grant of up to $10,000 to top up your deposit.
According to Kainga Ora, if you are buying an existing home, you can get $1,000 of the three years you have paid into the scheme. The most you can get is $5,000 for five or more years.
If you buy a new home or land, then you can get up to $2,000 for each of the three or more years you have paid into the scheme. The most you can get per person is $10,000 for five or more years.
To get this grant however there are some eligibility tests. The main ones are:
The Kainga Ora First Home Partner Scheme is one form of shared ownership scheme. This is where Kainga Ora will help bridge the gap if you r deposit and home loan aren’t quite enough to buy a brand new home. You can learn more about the scheme here.
Most banks require you to have a 20% deposit. The Kainga Ora First Home Loan you only need a 5% deposit which means getting into your first home is much easier. Just like with Kainga Ora First Home Partner, there are eligibility criteria which you can find here.
If you do decide to go down this route, you will need to work with either: Westpac, Kiwibank, The Co-operative Bank, SBS Bank, Unity Money, Nelson Building COmpany or NZ Home Loans.
If you are currently a Kainga Ora tenant, you could be eligible for a grant to go towards purchasing the home that you are currently living in. The Tenant Home Ownership grant is a gift of 10% of the purchase price of some Kainga Ora houses up to a maximum of $20,000. It is not available in most areas where there is high demand for state houses. This includes most of the major cities in New Zealand.
Non-bank lending refers to securing a loan from an institution other than a bank (that don’t include those covered above). You may decide to go down this route because you have a low deposit or you have a very specific circumstance.
Generally, non-bank lending is ideal for those who have been declined by their bank, either because they have poor credit history, are self-employed, and cannot prove their income, or have a low deposit. They typically also have much higher interest rates but can cater to your needs.
There are lots of different types of lending. When you decide on your type of lending and lender, it is a great start to start with better understanding your situation. Use websites like ours, settled.govt.nz and sorted.co.nz to learn a bit more about how to prepare to buy a house.
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