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Popular Mortgage Rate Terms
For borrowers wanting shorter-term flexibility. Popular when mortgage rates are rising as it tends to be the cheapest or when rates are falling so borrowers aren't locked in long term.
This is the most popular fixed rate mortgage term with almost half of mortgages in New Zealand being on a two-year term. It is also the term that banks are most competitive on.
Borrowers who want more long term certainty opt for a three-year fixed rate. Most borrowers tend to not think beyond three years.
Types of Mortgages
This type of home loan has a regular repayment amount and the loan is fully paid-off over a term of usually 25 or 30 years. In the early stages of the loan the bulk of what's paid off is interest, so the loan balance drops slowly.
Provided the borrower has more than twenty percent equity, most lenders will allow interest-only repayments for a period of up to five years. After that the loan reverts to principle and interest repayments over its remaining term.
A fixed rate mortgage can be principal and interest or interest-only. The rate and regular repayment amount are fixed for a set term of up to five years. At the end of the fixed term, the loan will revert to a floating rate but can be re-fixed. If a borrower repays a fixed rate mortgage early, they might get charged an early repayment cost.
Floating rate mortgages have a floating rate that only tends to move whenever the Reserve Bank moves the Official Cash Rate (OCR). Floating rates tend to be more expensive, but have greater flexibility. They can be repaid without cost and can be set up as revolving credits or offset mortgages.
A revolving credit is essentially an overdraft on a transaction account, but at floating mortgage rates. It gives the borrower flexibility to pay it off as fast as they like, and it can be drawn down again by transacting on the account. It can be a way to store unused credit limit, or have a "safety buffer."
An offset mortgage allows the borrower to offset any savings against their mortgage before interest is calculated. The benefit is similar to a revolving credit but also allows funds to sit over multiple accounts which can be useful if the borrower has multiple financial goals.
Banks are regulated by the Reserve Bank. They're bound by lending restrictions applied by the New Zealand and Australian regulators such as LVR (loan-to-value) limits and other macro-prudential tools. The four major banks have 87 percent market share of mortgages.
The number of these lenders is relatively small in New Zealand and usually constitutes those that have access to securitisation - the ability to package up mortgage securities and sell them to investors. These lenders typically have a higher risk tolerance and traditionally cater to in the self-employed market and lower documentation lending.
These lenders tend to ignore servicing and typically lend short-term, usually up to 12 months but sometimes up to two years. They are short-term lenders to builders and small scale developers, and for bridging finance or other financing where there is a clearly defined exit.