What is a home loan?
In order to buy a house, most people need to get a home loan. A home loan can help you purchase residential property. In a lot of cases, people get a home loan to buy a house to live in. In other cases, people can get a home loan for investment purposes. This is typically done where they want to rent the house out. There are also other variants of home loans such as short term loans, bridging loans, etc. With a home loan, the lender, such as a bank, credit union or finance company, takes security against the property, such as the land and house. This means that if you fail to meet your obligations, the lender could take security over it.
Types of interest rates
Fixed Rate – With this type of interest rate, the interest rate you pay on your loan is fixed. For example, if you fix an interest rate of 4%, you’ll pay 4% for the fixed term. Many people choose to fix their home loans for 1, 2 or 3 years. Lenders or banks could offer 5 year loan terms, and in rare cases, also 10 year loan terms.
Pros:
A lot of people enjoy fixed rates because it gives them certainty and clarity on what they will be paying. Also, fixed rates are potentially lower, meaning the home loan repayments are lower or cheaper. For example, if you get a fixed rate of 4%, that could be cheaper than a variable (floating) rate that for example is say 6%. That could mean that you pay a less amount of interest, during the fixed term.
Disadvantages:
If interest rates start to fall, then this is likely to mean that you would miss out on savings. For example if you had fixed your home loan in a time when interest rates were 5%, and these had now dropped to 4%, you would be missing out on that potential saving of 1%. It also means that if you are needing to potentially pay break fees or early repayment charges if repaying your fixed term early. Fixed terms can therefore be more expensive to make additional payments to pay your home loan off early. However it is noted that a number of lenders are allowing a certain amount to be paid off without any early repayment charge. Check with the lender for clarification
Floating:
With a floating interest rate, the interest rate can fluctuate. There are different reasons why interest rates can fluctuate, but reasons may include market conditions, the general economy, actions by the Reserve Bank of NZ, etc.
Pros:
One of the key advantages of a floating rate is that you can pay off some part of your home loan early without a penalty or early repayment charge usually. Also, if you are expecting floating rates to drop, then this means you can take an advantage of such a saving.
Cons:
With floating rates there is the potential for the rates to go up. Also, floating rates can possibly be more expensive than fixed rates.
Check with bank or lender as to what their rates are. You may also want to consider reviewing different websites and economic articles and credible sources.
Where to get a home loan from?
Bank
There are many banks in New Zealand. Examples of these are KiwiBank, TSB, ANZ, and so forth. Many people do enjoy the idea of having their home loan with their current bank. In other cases, people don’t mind using other banks. Sometimes, it may be necessary to use other banks if you cannot get a home loan with your main bank. This could be for a variety of reasons, but one common reason is that the bank you are with criteria is not able to support your situation.
Banks are highly regulated and have strict guidelines to follow. Accordingly, their criteria can be seen as strict, and this has been reported countless of times in New Zealand. It can be very helpful to request the assistance of a suitably qualified professional mortgage broker or financial adviser to assist with navigating bank criteria.
Advantages
Banks tend to have the most competitive interest rates. Competitive interest rates can mean that you pay less in terms of interest for your home loan. They can also have a wide and well known branch network, which makes it easy and convenient to bank. Banks also have other products and services, such as credit cards. Banks can also provide cash back contributions such as “$1,500 towards lawyer bills” – this is available in certain situations. Banks can also typically assist with construction loans and apartment loans.
Disadvantages
Generally speaking, banks have strict criteria. Accordingly, even candidates with okay credit profiles can find it challenging to get a home loan with a bank. It isn’t uncommon to hear that a person may have gotten declined from a bank home loan because they missed a few bills here and there, or they had a few too many personal loans, or their account went into overdraft a number of times. For other reasons, banks can also have stricter or less flexible criteria. So if your situation is unique, it can be harder to deal with it.
Building Societies or Credit Unions
Credit unions can often provide a unique offering, in that they represent a likely higher price point than a bank, but can usually accommodate customers in more challenging circumstances. For example, a credit union may be able to accept a customer with previous credit issues in recent times, whereas a bank might say that the customer is unlikely to be accepted for another few years at least. Credit unions tend to have more relaxed criteria, making them an attractive proposition.
Advantages:
Credit unions have more relaxed criteria, and as such it can be easier to appease the requirements of a credit union when applying for finance. Credit unions also often operate in a not for profit or cooperative style matter, which is to help bring a return for their members. Credit unions also have been reported to offer friendlier or more personal service by those who have elected to go down that path.
Disadvantages:
Credit unions can sometimes be quite geographically restrictive. For example they are not available in every town or area, or credit unions may only focus on a limited local area. This does depend on the credit union however. Furthermore, credit unions tend to be restrictive around the types of properties they would lend on. A credit union might be quite comfortable lending on a freestanding house, but unlikely to lend on an apartment.
Finance Companies
There are a number of different finance companies in New Zealand. Finance companies are generally a more expensive offering for loans. However, they do have their place in assisting in more challenging situations.
Advantages:
Finance companies, relatively speaking, have quite relaxed criteria. This means that they can accept borrowers generally with a higher risk profile. Some finance companies can also work with more unique solutions, such as a 2nd mortgage or caveat loans. They can also offer short term loans.
Disadvantages:
Finance companies are generally more expensive than dealing with other options. They also don’t tend to offer the full suite of banking products e.g. would not offer a credit card or EFTPOS card as such. You would normally keep your day to day transactional banking with a bank.[/vc_column_text][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row]