What is a Mortgage, How Do I Get One, and How Can I Pay It Off Early?

For many New Zealanders owning their own home is an important step towards financial stability and freedom, and for most Kiwi’s this means getting a mortgage. But getting a mortgage is only the first step, the next step is paying off the loan. In this quick read we’re going to dive into what you need to know about mortgages. 

What is a Mortgage?

A mortgage and a home loan are often confused, but they’re not the same. A home loan is the money you borrow, usually using the value of a property. A mortgage, on the other hand, is the agreement you sign with the lender, giving them the right to sell the property if you don’t pay back the loan as agreed.

For the remainder of this blog we will be explaining home loans. You can use these loans for any purpose that the lender agrees to, but it’s typically used to buy property.

When applying for and maintaining repayments on a home loan there are four considerations

1. Loan Principal: This is the amount of money you borrow from the lender.
2. Interest: This is the cost of borrowing the money, usually expressed as a percentage of the loan principal.
3. Loan Term: This how long you will have to repay the loan.
4. Loan Structure: This is how the loan will be organised, and can include things like the type of loan, interest rates and terms, special features like offset loans or revolving loans and more. A loan structure can be modified over the life of the loan to ensure it meets your needs and remains affordable when things change.

How Do I Get a Home loan to buy property?

To obtain a home loan you need to complete an official application and have your situation assessed by a lender. Lender assessments can be broken down into three parts. An assessment of your finances, an assessment of your financial habits or readiness and lastly an assessment of the property.

Your money

When a lender assesses money, they’re really looking at whether you can comfortably afford to repay the loan. This is about your, deposit, income, expenses, and overall financial situation, which helps the lender understand if you have the capacity to handle the required repayments.

Key factors in this assessment include your income level, employment status, and monthly expenses. Lenders will look at your primary income, whether it’s from a salary, self-employment, or other sources, and may also consider additional income like bonuses, investments, or rental income. They’ll compare this with your regular expenses, such as rates, utilities, and any existing debt repayments, to determine what you have left over each month.

A helpful tool here is the debt-to-income ratio, which is simply the percentage of your monthly income that goes toward debt payments. A lower debt-to-income ratio signals a stronger capacity to take on new debt and pay it back. The goal is for the lender to feel confident that your finances are stable and that you can comfortably manage new loan repayments without hardship.

Your financial habits and readiness

When a lender assesses someone’s readiness to take on a large financial commitment, they’re essentially asking, “How likely is this person to repay the loan?”

To assess this, lenders look at factors like your credit history, employment stability, and overall track record with finances. A good credit history shows you’ve been responsible with money in the past, which boosts lender confidence that you’ll manage future repayments well. Stability in employment or consistent income history is another big plus — it shows reliability and a steady ability to earn income.

Beyond the numbers, lenders may also consider the details you provide about yourself. If you’re committed to managing your finances and have a solid plan for how the loan fits into your goals, that positive attitude can make a strong impression. In short, the financial readiness assessment helps lenders feel they’re working with someone who fulfils their commitments and takes repayment seriously.

The Property

When lenders assess property, they’re determining whether the property itself is a good security for the loan. This assessment is crucial because, in case the borrower cannot repay the loan, the lender might need to sell the property to recover the loan amount. The goal is to ensure that the property’s value aligns with the loan amount, providing sufficient security for the lender.

To do this, lenders consider factors like the property’s location, condition, size, and features. For example, homes in desirable neighborhoods or areas with strong market demand typically hold value well. The property’s structural condition and recent sales of similar homes nearby also play an essential role in this assessment. Sometimes this assessment may require a property valuation by a certified appraiser who can confirm the properties value.

Additionally, lenders may consider any potential issues, such as zoning restrictions or structural concerns, which could affect the property’s resale value. By confirming that the property is a solid investment, lenders reduce their financial risk and ensure that, should they need to sell it, they’re likely to recover the loan amount.

Key assessment takeaways

Together the three assessments make up the lender’s eligibility criteria. When you meet eligibility criteria then your lender can have confidence that you’re a reliable borrower with the means to repay the loan and a property that supports the loan amount, paving the way for loan approval. Each Lender has their own eligibility criteria for these assessments and a mortgage broker or adviser can help you determine which lenders would be a good fit for you needs

How Do I Pay Off My Home Loan Early?

Paying off your home loan ahead of schedule can save you significant money on interest and provide peace of mind, and for many homeowners this is the ultimate goal. Owning your house outright, and being completely free of a mortgage has many financial and emotional benefits. 

Just like getting a home loan, there are things to consider before you make any changes to your repayments or making lump sum payments. It is important to speak with your lender or mortgage adviser first to ensure that your additional payment(s) is permitted under your loan agreement or term conditions. Specifically, you will want to confirm your proposed additional payments will not incur penalties. With that said, here are some strategies to help you pay off your home loan sooner:

Make Extra Repayments

Consider making additional repayments on your loan, whether monthly, quarterly, or as a lump sum. Even small extra payments can significantly reduce your principal balance and interest costs over time.

Increase Your Regular Payments

If your budget allows, think about increasing your regular repayments. A modest increase can lead to substantial savings in interest and help you pay off your loan faster. If you receive a pay rise or your income increases this can be a good time to reassess your repayments.

Refinance Your Home Loan

Refinancing can help you secure a lower interest rate, which can save you money and allow you to pay off your loan faster. However, consider any associated fees to ensure the long-term benefits outweigh the costs.

Use Windfalls Wisely

If you receive unexpected funds, such as a tax refund or bonuses, consider applying that money toward your loan balance. This can make a significant dent in your principal.

Consider Biweekly or Weekly Payments

By making biweekly or weekly payments, you effectively pay down your loan more quickly than with traditional monthly payments, reducing your overall interest payments.

Reduce your loan term

Reducing you loan term will have the effect of increasing your minimum payment and allow you to pay more without penalty.

Key assessment takeaways

The only way to pay your home loan off early is to pay more than the minimum. There are a range of ways this can be achieved depending on your loan conditions and financial situation. To understand the best options for you, you can speak with a mortgage broker, adviser, or your lender directly.