Borrowing to Buy: Home Loan Finance
Whether you’re buying your first or next home, First Step Home Loans will help you through the process, from choosing the right home loan to applying on your behalf and structuring your mortgage based on your needs. With access to over 30 mortgage lenders, we’ll find the perfect home finance package for your home loan.
Keep in mind that as life goes forward your financial needs can change, be it a change in your job or a new family member. So to ensure you’re maximising the benefits with your home loan we recommend you review it on a regular basis.
Types of Home Loans
Choosing the right home loan can save you thousands of dollars and knock years off your mortgage. So it’s important to know all your options and make an educated choice. See the main attributes of each home loan type below.
The First Home Loan, formerly called Welcome Home Loan, is offered by lenders, supported by Housing New Zealand and New Zealand Government. It was designed for first home buyers who can afford to make regular repayments on a home loan, but have trouble saving for a large deposit.
To apply for a First Home Loan, you need to meet specific eligibility criteria. Find out if you are eligible.
The maximum amount you can borrow with a First Home Loan depends on the region you are buying in. Check house price caps per region here.
Benefits of a Welcome Home Loan
Possible to buy a property with a 10% deposit.
If you have KiwiSaver there are options to use these funds towards your deposit.
Your deposit can be a gift from a family member, as long as they gifted it at least 3 months before the time you use it to purchase your home.
Disadvantages of a Welcome Home Loan
Only available to New Zealanders who meet specific eligibility criteria.
There are restrictions on the value of the property you can buy.
A lower deposit means you’re borrowing more, so unless managed will pay more interest over time.
You still have to meet all the banks general lending criteria on top of the ‘First Home Loan’ criteria.
A fixed home loan is one of the stock standard options in home loans. ‘Fixed’ refers to the interest rate that you will be charged on your home loan. You can choose to lock in your interest rate from a 6-month term to anywhere in between up to 5 years. The longer the term that you lock your interest rate in that it will be slightly higher because you are paying for the security of that fixed interest rate. You are locked into this rate for the term that you choose.
Benefits of a Fixed Home Loan
Great for budgeting and knowing exactly what repayments you will have.
Security of the interest rate not skyrocketing as the market changes.
Help you keep track because they have regular repayments and a set date.
If you fixed your home loan rate and the interest rates increase you're on a winner... saving money.
Disadvantages of a Fixed Home Loan
Restrictions if you want to make additional or lump sum payments.
Heavy penalties and break fees for early termination.
If interest rates reduce you will miss out on the savings with the lower rates.
On the opposite end of the ‘Fixed’ home loan is the ‘Floating’ home loan. This is where the interest rate is not locked in, not guaranteed and fluctuates with the market meaning it can skyrocket or go right down. This also means that your repayments are not a fixed amount which may make it harder to budget.
Benefits of a Floating Home Loan
Usually no break fees for early termination.
Repayments will vary as interest rates rise or fall.
Flexibility to make additional payments or repay the loan in full at any time.
Lump sum payments can be made at any time usually with no penalties.
Disadvantages of a Floating Home Loan
Higher risk with interest rates increasing and your repayments increasing.
Difficult to budget – no certainty for the future.
An Interest Only home loan is one where, for a certain period of time, you only have to pay back the interest accrued on your loan without any money going towards paying back the principal.
These Interest Only home loans are usually short term, of up to 5 years. At the end of the interest only period, the loan will either have to be paid in full or converted to a standard mortgage; fixed or floating.
Due to this, we recommended that this type of loan is used for investment properties. Where you plan on renovating it in the term of the loan then sell it on. This does rely on rising property prices to outweigh the borrowing costs.
Benefits of an Interest Only Home Loan
Lower repayments, because you’re not repaying principal.
Taking advantage of interest rates reducing.
You can free up cash for other purposes.
Can be tax-efficient for property investors.
You are paying interest on the full amount borrowed until the agreed time.
Disadvantages of an Interest Only Home Loan
Falling house prices could lead to negative equity.
Higher exposure to rises in interest rates.
Usually only available for a term of up to five years.
Loan balance and interest instalments do not reduce over time.
If you have been contributing to your KiwiSaver for 3 or more consecutive years you can apply to withdraw your balance to put toward your deposit. You can apply to withdraw all but the initial $1,000.
There is a process to follow when applying to withdraw funds from your KiwiSaver. These processes and time frames differ with each provider. Be sure to check with your KiwiSaver fund manager to see if you are able to access your KiwiSaver to buy a house, and how long it will take to access your funds.
Keep in mind this takes up to 10 working days to process. Please check with your KiwiSaver provider to ensure you are able to access this money as not all KiwiSaver schemes allow you to withdraw funds for a house deposit.
The standard amount for purchasing a property is a deposit of at least 20%, while with a Low Deposit home loan this amount is below 20%. There are many rules around banks allowing a low deposit, as this is a greater risk to them. To qualify for a Low Deposit home loan, you need to meet specific eligibility criteria.
If you’re looking to buy your first home and have less than 20% deposit, consider a Welcome Home Loan.
Benefits of a Low Deposit Home Loan
You can buy your property with less savings/less deposit.
Being on the property market ladder sooner.
Disadvantages of a Low Deposit Home Loan
Very strict rules, hard to qualify.
Some banks limit purchase price, due to the high risk for them.
Limited to locations and types of property that qualify.
Higher cost because of the low equity fees.
Higher repayments to the extra fees incurred.
An Offset home loan is where you can link your savings and or everyday accounts to your mortgage account, essentially all these balances are added together and you just pay off the interest on the remaining part. For example, if your home loan is $350,000 and you have $20,000 in your savings account, you’ll be paying off the interest of $330,00 instead of the whole loan amount of $350,000. So the more money that you have in your savings or everyday account, the less interest you pay.
Benefits of an Offset Home Loan
You pay less in interest, meaning you pay off your home loan sooner.
Typically there is no fixed term.
Still, have access to your cash while repaying your loan sooner.
Due to not earning interest on your savings that are linked to your mortgage account you also won’t pay tax.
Disadvantages of an Offset Home Loan
Any and all accounts that are linked to your home loan account will not earn interest. But typically interest on the debt is higher than the interest you earn on savings making the offset worthwhile.
As the rate of interest is floating, it can go higher than fixed term rates and if the interest rate goes up, so will your repayments.
A Revolving Credit home loan, also known as ‘Line of Credit’ or a ‘Revolving Credit Loan’ is like having a large overdraft. Unlike common home loans, the Revolving Credit home loan is linked to a transaction account. Your loan account becomes your everyday account, with your income going in and expenses coming out of it.
The interest you are charged on your loan is calculated on the amount in your account each day, so you’ll need to budget carefully to keep as much money in the account as possible.
Benefits of a Revolving Home Loan
Great if you have an irregular income, as there are no fixed repayment periods.
Handy if you’re building or renovating - as you’ll just be accessing money when it’s needed instead of topping up your home loan in one big chunk.
Uses all your savings and income to reduce the total interest charged.
Disadvantages of a Revolving Home Loan
Your loan will be on a floating rate, exposing you to increasing rates.
If you’re not disciplined and keep borrowing up to the credit limit you’ll end up paying interest on the loan year after year.
This is a mix of the ‘Fixed’ and “Floating’ home loans, it can give you the best of both and minimise the risk of going into a full Floating home loan. This allows you to split your home loan with different interest rates.
You may know of some extra cash coming in the future, and to account for this you could leave a small part of your loan floating to then add your lump sum to and have the majority at a fixed rate.
Benefits of a Split home loan
Knowing your repayments on the fixed-rate portion.
Being able to make lump sum payments on the floating portion.
Reduced exposure to raising interest rates, giving you more control over your loan.
Disadvantages of a Split home loan
Uncertainty of interest rates on your floating portion.
Limited to making additional repayments to fixed portion loans.
Incurring expensive penalties when changing fixed term loan.
The First Home Loan, formerly called Welcome Home Loan, is offered by lenders, supported by Housing New Zealand and New Zealand Government. It was designed for first home buyers who can afford to make regular repayments on a home loan, but have trouble saving for a large deposit.
To apply for a First Home Loan, you need to meet specific eligibility criteria. Find out if you are eligible.
The maximum amount you can borrow with a First Home Loan depends on the region you are buying in. Check house price caps per region here.
Benefits of a Welcome Home Loan
Possible to buy a property with a 10% deposit.
If you have KiwiSaver there are options to use these funds towards your deposit.
Your deposit can be a gift from a family member, as long as they gifted it at least 3 months before the time you use it to purchase your home.
Disadvantages of a Welcome Home Loan
Only available to New Zealanders who meet specific eligibility criteria.
There are restrictions on the value of the property you can buy.
A lower deposit means you’re borrowing more, so unless managed will pay more interest over time.
You still have to meet all the banks general lending criteria on top of the ‘First Home Loan’ criteria.
A fixed home loan is one of the stock standard options in home loans. ‘Fixed’ refers to the interest rate that you will be charged on your home loan. You can choose to lock in your interest rate from a 6-month term to anywhere in between up to 5 years. The longer the term that you lock your interest rate in that it will be slightly higher because you are paying for the security of that fixed interest rate. You are locked into this rate for the term that you choose.
Benefits of a Fixed Home Loan
Great for budgeting and knowing exactly what repayments you will have.
Security of the interest rate not skyrocketing as the market changes.
Help you keep track because they have regular repayments and a set date.
If you fixed your home loan rate and the interest rates increase you're on a winner... saving money.
Disadvantages of a Fixed Home Loan
Restrictions if you want to make additional or lump sum payments.
Heavy penalties and break fees for early termination.
If interest rates reduce you will miss out on the savings with the lower rates.
On the opposite end of the ‘Fixed’ home loan is the ‘Floating’ home loan. This is where the interest rate is not locked in, not guaranteed and fluctuates with the market meaning it can skyrocket or go right down. This also means that your repayments are not a fixed amount which may make it harder to budget.
Benefits of a Floating Home Loan
Usually no break fees for early termination.
Repayments will vary as interest rates rise or fall.
Flexibility to make additional payments or repay the loan in full at any time.
Lump sum payments can be made at any time usually with no penalties.
Disadvantages of a Floating Home Loan
Higher risk with interest rates increasing and your repayments increasing.
Difficult to budget – no certainty for the future.
An Interest Only home loan is one where, for a certain period of time, you only have to pay back the interest accrued on your loan without any money going towards paying back the principal.
These Interest Only home loans are usually short term, of up to 5 years. At the end of the interest only period, the loan will either have to be paid in full or converted to a standard mortgage; fixed or floating.
Due to this, we recommended that this type of loan is used for investment properties. Where you plan on renovating it in the term of the loan then sell it on. This does rely on rising property prices to outweigh the borrowing costs.
Benefits of an Interest Only Home Loan
Lower repayments, because you’re not repaying principal.
Taking advantage of interest rates reducing.
You can free up cash for other purposes.
Can be tax-efficient for property investors.
You are paying interest on the full amount borrowed until the agreed time.
Disadvantages of an Interest Only Home Loan
Falling house prices could lead to negative equity.
Higher exposure to rises in interest rates.
Usually only available for a term of up to five years.
Loan balance and interest instalments do not reduce over time.
If you have been contributing to your KiwiSaver for 3 or more consecutive years you can apply to withdraw your balance to put toward your deposit. You can apply to withdraw all but the initial $1,000.
There is a process to follow when applying to withdraw funds from your KiwiSaver. These processes and time frames differ with each provider. Be sure to check with your KiwiSaver fund manager to see if you are able to access your KiwiSaver to buy a house, and how long it will take to access your funds.
Keep in mind this takes up to 10 working days to process. Please check with your KiwiSaver provider to ensure you are able to access this money as not all KiwiSaver schemes allow you to withdraw funds for a house deposit.
The standard amount for purchasing a property is a deposit of at least 20%, while with a Low Deposit home loan this amount is below 20%. There are many rules around banks allowing a low deposit, as this is a greater risk to them. To qualify for a Low Deposit home loan, you need to meet specific eligibility criteria.
If you’re looking to buy your first home and have less than 20% deposit, consider a Welcome Home Loan.
Benefits of a Low Deposit Home Loan
You can buy your property with less savings/less deposit.
Being on the property market ladder sooner.
Disadvantages of a Low Deposit Home Loan
Very strict rules, hard to qualify.
Some banks limit purchase price, due to the high risk for them.
Limited to locations and types of property that qualify.
Higher cost because of the low equity fees.
Higher repayments to the extra fees incurred.
An Offset home loan is where you can link your savings and or everyday accounts to your mortgage account, essentially all these balances are added together and you just pay off the interest on the remaining part. For example, if your home loan is $350,000 and you have $20,000 in your savings account, you’ll be paying off the interest of $330,00 instead of the whole loan amount of $350,000. So the more money that you have in your savings or everyday account, the less interest you pay.
Benefits of an Offset Home Loan
You pay less in interest, meaning you pay off your home loan sooner.
Typically there is no fixed term.
Still, have access to your cash while repaying your loan sooner.
Due to not earning interest on your savings that are linked to your mortgage account you also won’t pay tax.
Disadvantages of an Offset Home Loan
Any and all accounts that are linked to your home loan account will not earn interest. But typically interest on the debt is higher than the interest you earn on savings making the offset worthwhile.
As the rate of interest is floating, it can go higher than fixed term rates and if the interest rate goes up, so will your repayments.
A Revolving Credit home loan, also known as ‘Line of Credit’ or a ‘Revolving Credit Loan’ is like having a large overdraft. Unlike common home loans, the Revolving Credit home loan is linked to a transaction account. Your loan account becomes your everyday account, with your income going in and expenses coming out of it.
The interest you are charged on your loan is calculated on the amount in your account each day, so you’ll need to budget carefully to keep as much money in the account as possible.
Benefits of a Revolving Home Loan
Great if you have an irregular income, as there are no fixed repayment periods.
Handy if you’re building or renovating - as you’ll just be accessing money when it’s needed instead of topping up your home loan in one big chunk.
Uses all your savings and income to reduce the total interest charged.
Disadvantages of a Revolving Home Loan
Your loan will be on a floating rate, exposing you to increasing rates.
If you’re not disciplined and keep borrowing up to the credit limit you’ll end up paying interest on the loan year after year.
This is a mix of the ‘Fixed’ and “Floating’ home loans, it can give you the best of both and minimise the risk of going into a full Floating home loan. This allows you to split your home loan with different interest rates.
You may know of some extra cash coming in the future, and to account for this you could leave a small part of your loan floating to then add your lump sum to and have the majority at a fixed rate.
Benefits of a Split home loan
Knowing your repayments on the fixed-rate portion.
Being able to make lump sum payments on the floating portion.
Reduced exposure to raising interest rates, giving you more control over your loan.
Disadvantages of a Split home loan
Uncertainty of interest rates on your floating portion.
Limited to making additional repayments to fixed portion loans.
Incurring expensive penalties when changing fixed term loan.
