How to calculate your mortgage

How to calculate your mortgage

How much will my mortgage cost? It’s a good question for first home buyers to ask. Your regular repayments will vary depending on whether:

- You choose fixed, floating/variable rates;

- Your mortgage's loan term is spread over 15/20/25 or 30 years;

- You choose fortnightly or monthly mortgage repayments; and

- The amount of your deposit.

Kiwibank’s Mortgage Area Manager, Jo Kupa, goes through all of these scenarios and more when she meets with customers to provide financial advice. Everyone’s situation and finances are different; meeting a bank's lending criteria or getting an offer of finance is just the tip of the iceberg.

Kupa cites an example of a $640,000 home loan on an $800,000 property with a 20% deposit over 30 years. On a 2.49% fixed rate currently, you would pay $1162 a fortnight. Or if you only have a 10% deposit, you’d pay 3.34%, which is $1296 per fortnight.

How are loan amounts calculated?

Digging down into the variables can help first home buyers understand how their mortgage is calculated. Some of those variables include:

- Fortnightly versus monthly mortgage payments;

- Mortgage terms;

- Multiple fixed interest periods;

- Your deposit percentage when buying a home;

- Whether you can afford to pay more to a mortgage lender; and

- Rising interest rates.

How payments and repayments affect your loan

Fortnightly payments add up to the equivalent of one more monthly payment per year because there are more than four weeks in a month. Paying more might not sound good on the surface, but it means you’ll pay less interest over the life of your mortgage, says Kupa.

When it comes to mortgage terms, most first home buyers choose 30-year mortgages. If instead, you pay it off over 15, 20 or 25 years, you will end up reducing your mortgage faster. This is because on a mortgage, you only pay interest on the outstanding principal (the money you borrowed) - paying it off over a shorter period means that you pay less. On that $640,000 mortgage with Kiwibank, you’d pay $95,987 less interest at current rates over 20 years than you would over 30.

It’s also quite common to split your mortgage into chunks, with each on different fixed rate periods. That way if one of your fixed periods finishes and interest rates have risen in the meantime, only the corresponding portion of your mortgage goes up.

The amount you paid for a deposit factors into your future loan amount too. Many first home buyers dream of buying on a 5% or 10% deposit. The downside is that higher interest rates apply, or extra “low equity” charges, if you have less than the standard 20% equity. At Kiwibank, for example, the interest rate currently for one year fixed on a 20% deposit is 2.49% but it is 3.34% on a 10% deposit. Whether it’s a one-off low equity premium or a higher interest rate, you pay extra to the bank in circumstances where they think you have a higher risk of defaulting.

Interest rates and interest-only mortgages

Current interest rates are historically cheap, says Jeff Royle, mortgage broker at iLender, even with the recent Reserve Bank of New Zealand LVR changes. Still, banks must assess your ability to pay on a test rate that’s around 6% in order to meet the Responsible Lending Code; they can’t knowingly put you in jeopardy of financial difficulty. If you’re only actually paying 2.5% to 3% interest, then you can most probably afford to pay more and reduce your outstanding mortgage faster.

Both Kupa and Royle also run through possible scenarios with clients so they’re aware of how much they’d pay if interest rates rose by even 1% or 2%. One bonus of having paid down extra when you can on your mortgage is being more prepared for interest rate rises. You’ll have paid off extra principal, which reduces the payment shock of higher rates, says Royle.

You can pay more by choosing a shorter term or make overpayments on your existing mortgage if your bank allows this. For example, Kiwibank allows customers to overpay 5% per year without penalties, says Kupa. If you did that every year you could reduce a 25 year mortgage to 11 years and shave $127,849 off the overall cost.

You may have heard about interest-only mortgages. You pay less when you sign up to these because you only pay the interest, not the principal. Neither Kupa nor Royle recommends that first home buyers pay interest only. It’s risky and it may not even be available to you as an option because of various credit score or credit check concerns.

Royle is also not a fan of flexi mortgages for first home buyers. Because these allow you to withdraw money from your mortgage, the issue for newbies is being tempted by a nice sum of money in their mortgage account. “Then you drive past Yamaha, get tempted, and go in and buy a jet ski.”

If you’re not sure where to start, why not use a repayment calculator like Kiwibank’s? This could help you get a better idea of how quickly you’ll be able to pay off your home loan. Remember, any online calculator is intended as an estimate or a guide only - always get your mortgage or lending contact to read through the terms and conditions of the mortgage arrangement that you’re financially able to commit to.

Our first home buyers hub is also a great resource if you have more questions about finance. Already read up on the essentials? Then check out our articles on your next steps: paying the deposit on your dream home