How to get your first home loan

Don’t feel pressured to sign up but do think about how you’ll manage if things change for you in the future.

Low interest rates and easing restrictions on home loans may be making property ownership look more attainable for some buyers, but that doesn’t mean mortgages are easy to get.

“If you’ve got your deposit tucked away and you’re seriously looking for somewhere to buy, it’s a good idea to start shopping for a mortgage before you need one,” says Real Estate Authority (REA) chief executive Kevin Lampen-Smith.

“The home-buying process can move fast, and it makes things much easier if you’ve already got a lender on side. This is known as pre-approval and it can take a lot of the uncertainty out of knowing what you can afford.”

First up, a lender will want to know how much deposit you have. Most lenders expect first home buyers to have at least 20 per cent of the amount they want to borrow. With the average New Zealand house price now at $550,000, a $110,000 deposit is needed.

“While the bank or financial institution needs to make sure you’re a safe risk, there are two sides to this relationship,” Lampen-Smith says.

He says that your first question – after how much they will let you borrow, and what the interest rate will be – should be about fees: what will you have to pay for taking out this mortgage?

For example, will you have to pay a low equity fee if you have less than 20 per cent deposit? Will there be any penalties if you pay off a chunk of the mortgage early? Can they waive your normal account fees if you take out a mortgage?

“Remember that you must be able to afford the repayments and you don’t have to borrow up to your highest limits if you don’t want to,” Lampen-Smith says.

“Ask what the best way is to structure the mortgage based on your circumstances, and whether this is flexible if things change.”

For example, are you better off with a table loan (where you sign up to make regular payments for a set term up to 30 years), or will you be able to pay it off faster if you have a revolving credit loan or offset mortgage?

Also, will you still be able to afford the mortgage payments if the interest rate goes up? If the property needs a lot of renovation work to become liveable, could an interest-only loan work?

Lampen-Smith says the lender or a mortgage broker should be able to explain all the pros and cons of these different loan types, including how they’ll affect your payments and the total amount you’ll have to pay.

Most lenders will require you to have insurance for a property when taking out a mortgage. You may be encouraged to get this insurance through the lender or sign up to any number of other insurance policies, such as mortgage protection, income protection and life insurance.

“Look at these carefully,” Lampen-Smith says. “Don’t feel pressured to sign up but do think about how you’ll manage if things change for you in the future. Life changes don’t respect the terms of a mortgage and you might find yourself wanting or needing to sell the house and buy another one.

“Ask the lender if the mortgage (and its terms and conditions) is portable to another property.”

Some lenders offer sweeteners to entice people to sign up with them. Examine the conditions of these deals carefully. Don’t let the short-term ‘carrot’ of a $200 gift voucher blind you to a higher interest rate.

“Signing up to a home loan is like entering any long-term partnership,” says Lampen-Smith. “Do your homework before you commit and you’ll be a lot better off in the long run.”