What to consider before committing to a mortgage

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Before committing to a mortgage it is important that prospective home owners take into account a range of factors, from the current state of the market to their financial and personal circumstances, in ensuring a clear path to home ownership.

It is worthwhile keeping in mind the long-term nature of committing to a mortgage and the responsibilities that come with it – home ownership may not be for everybody, and prospective home owners should weigh up what they want in both the short and long term.

The vast majority of individual debt taken on by New Zealanders is tied to real estate loans, and the amount of time it will take to pay off a home loan should be a primary consideration of prospective home owners.

Figures released by Statistics New Zealand last year showed that 87 per cent of total individual debt held by New Zealanders in the year ended June 2015 was attributable to real estate loans, with some older people having debts on real estate even as they went into the retirement age.

According to Statistics New Zealand, the average loan owed by those aged 25–44 years on owner-occupied property was $145,000, and for those aged 45–64 years was $107,000, while the average loan on “other” properties across each of these age groups remained at about $176,000.

With this in mind, what should prospective home owners consider before taking on a mortgage?

What’s your budget?

Calculating

Determining your current total weekly and monthly expenses, from groceries to rent to entertainment, will help in developing a budget dedicated to the purchase of a property, assisting in providing an assessment of what will be in your price range.

Weighing up these factors and assessing expenses in the context of your current income will demonstrate your capacity to take on a mortgage, and may also provide insight into better budgeting practices.

It may well be that certain sacrifices need to be made to take on a mortgage and assessing your budget will help with this process. Smart money management will also help in saving for a deposit, potentially reducing the amount of the loan required.

It is important to assess your capacity for making ongoing mortgage payments, and many lenders provide online calculators in determining this – such as how much can be borrowed and what ongoing payments will need to be.

As an initial step, before approaching a lender it is important to be realistic with your budget, as when it comes time to taking out a mortgage lenders will require a range of information in assessing your financial suitability.

How much will your deposit need to be?

In taking out a mortgage you will need to pay a deposit, the percentage of which can vary dependent upon the amount being borrowed, and it is important to keep in mind what sort of a deposit will need to be paid in assessing your capacity to purchase a property.

Last year, following consultation about changes to Loan to Value Ratio (LVR) rules, the Reserve Bank of New Zealand confirmed new rules for bank lending to residential property buyers.

As outlined by the Reserve Bank, LVR “is a measure of how much a bank lends against mortgaged property, compared to the value of that property”.

Under the rules, owner-occupiers will generally need a 20 per cent deposit, while residential property investors will generally need a 40 per cent deposit, for a mortgage loan, however banks will still be able to make a small number of loans to borrowers with smaller deposits.

Given this likely 20 or 40 per cent figure for a deposit, prospective home owners can estimate how much initial outlay will be needed in securing a mortgage, determining what their total budget range will be for purchase of a property.

Shopping around for a mortgage

Mortgage form on table.

It is worthwhile shopping around for a mortgage, and considering all available options before making a financial commitment, as securing the right mortgage, with the right structure and interest rates, could result in significant savings.

It is important to keep in mind that there are many lenders competing for business, and that as a consumer you hold the power to negotiate.

Keep an eye on interest rates, and the respective deals being offered by lenders, and in negotiating a mortgage see what sort of deals lenders are prepared to offer, and also be prepared to push for better deals.

Banks may be the first port of call for applicants looking to take out a mortgage, however mortgage brokers (acting to negotiate a loan between a borrower and a lender) also present an option.

If an application has been rejected by a bank, using a mortgage broker may be an option, with the broker able to liaise with a variety of lenders, both banks and other lenders such as building societies and credit unions, in securing a deal, with the broker paid a commission by the lender.

Consumers will need to determine the structure of their mortgage, with a range of options available from different lenders, broadly encompassing fixed interest rates (fixed for a set period of time) and floating rates (rising or falling in response to market movements), or a mixture of the two.

The structure of the mortgage can vary significantly from one mortgage to the other and from lender to lender, and it is worthwhile taking into account a range of factors in determining which mortgage is the most suitable, keeping in mind that the faster you pay a mortgage off the less interest you will pay.

In addition to the interest rates being offered and the structure of the mortgage, consumers should also keep in mind other costs associated with buying a home, such as legal fees.

What will banks consider?

Banks will take into account a variety of factors in determining an applicant’s suitability for a mortgage, and applicants will need to provide banks with a range of information and throughout the process should expect to have their finances closely scrutinised.

In commencing the process, applicants can expect to be asked to provide comprehensive details of their income, details of any debt they have and information about their expenses, and details of their deposit. For applicants who are self-employed, specific documentation can be expected to be required.

As the process progresses, applicants can expect for banks to request additional information, including documentation related to the purchase of a property along with additional income details, and other specific details that may vary from one application to the next.

Depending upon the bank, applicants may have the option of commencing the process online or at a branch.

Is it the right time to buy?

Ultimately, when applying for a mortgage, banks will assess your financial suitability, however before committing to a home loan applicants should take into account a range of factors.

Circumstances have the potential to change, and as far as it is possible, it is worthwhile considering your personal and financial circumstances in both a short-term and long-term context, as planning ahead will help prevent or mitigate potential future issues.

It may be looked upon as “the sooner the better” when it comes to buying a home, bringing with it the promise of future security, however before taking on the responsibility of a mortgage it is worthwhile for prospective home owners to assess all of their options.

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