Home Loan Basics
How do home loans work?Home Loans 101. Your guide on what a home loan is, what interest rates are and what banks and lenders want in return for lending you money?
Home Loan Basics
What is a home loan or mortgage?
The term 'home loan' and 'mortgage' are terms used interchangeably and often refer to the money that someone borrows from a bank or specialist lender to purchase property.
How long do I have to repay the home loan?
The bank calculates monthly (or fortnightly if you wish) repayments over a length of time, referred to as the 'loan term'. The maximum loan term available is 30 years, but this can be less depending on different factors around your application. If you keep up with the minimum regular repayments, by the end of this loan term, you will have fully repaid your home loan.
What are the fees and interest rates?
A bank or lender will charge you interest in exchange for the benefit of borrowing money. Your regular repayments will cover the interest cost for that month as well as part of your loan balance (unless you're on an interest only loan). See our 'Understand Interest and Fees' guide on the different types of interest and fees that you may come across in your home loan journey.
What do the lenders use as security?
When banks lend you money, they want to use a physical asset to 'secure' their money. This means that if you default on your home loan and communication breaks down, they have an asset to sell to recoup the money that they have lent you. (Note that this process, a mortgagee sale, is a last resort for the bank and they will try to work through any difficulties before getting to this stage).
When you purchase your property, your ownership will be registered with Land Information New Zealand and it will also be noted on the Certificate of Title (also known just as the 'Title'). Also noted on the title will be the bank's interest, or mortgage (confusing, we know!) over the property. This means that you cannot change anything on the title of the property (eg ownership) unless the bank agrees to it. In most cases, this will mean repaying your home loan with them. For example, if you sell your home, the money you receive from your buyers will be used to repay the home loan before the bank agrees to remove their mortgage over the property to allow you to settle.
Related Questions
What's included in my loan repayment?
Your home loan payment includes a portion of principal repayment and a portion of interest payment. The principal is the amount borrowed from the bank, and in each repayment you repay a small portion of this back over the term of the loan. The interest is what the bank charges for lending you the principal in the first place, and is charged at either the agreed rate (fixed) or current rate (floating) for your fortnightly or monthly payment period.
Should I make payments fortnightly or monthly?
Generally, the more frequent your payments, the faster you will reduce your loan and the amount of interest you'll pay.
Consider your own cashflows when deciding on loan repyament frequency; do you get paid fortnightly or monthly? Would it be easier for you to manage your repayments if they lined up to your pay cycle?
What is paid off first, the principal or interest portion of my home loan?
This depends on how your loan is structured. You can choose table repayments, which is paying off your principal and interest or choose to have an interest only loan. For a table loan structure, you are paying more interest at the start of the loan term as your principal amount owed is at its biggest. As the loan term progresses, the proportion of your repayments going towards principal will increase.
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