Home loans are nearly always conditional on transferring the property title to the lender of the loan for the duration of the loan. This transfer is a mortgage and it provides security to the lender for the duration of the loan. If you are unable to repay the loan, the lender is legally entitled to sell your property to recover the balance of the outstanding loan.

However, if you borrow money from family members to fund part of your house purchase, it is unusual for them to invoke a mortgage to protect their loan to you. But it is in your best interests to fully document the loan.

Flat Mortgage (interest only):
Flat mortgages are loans where you pay only the interest component of the loan throughout the term. At the end of the term, you pay back the principal as a single lump sum. Flat mortgages are not common. The term tends to be short (three to five years) and the interest rate charged is generally higher than that attached to other types of mortgage. At the end of the term, a flat mortgage generally converts to a table mortgage.

Table Mortgage:
With table mortgages, the size of each repayment stays the same (other than when interest rates change) throughout the term. This is the most common type of mortgage. You start by paying back mostly interest and only a little principal. As you chip away at the principal, the interest gradually reduces - and so the proportion of interest and principal you pay with each repayment changes. By the end of the term you are paying virtually all principal, and very little interest.

Straight Line (reducing) Mortgage:
The amount of principal you pay throughout the term stays the same with a straight line mortgage. As the principal is paid off the interest reduces, and thus so does the total repayment you make. Initially payments tend to be much higher than for an equivalent table loan.

The rate of interest charged on your New Zealand home loan can be set in one of three ways - Floating Interest Rate, Fixed Interest Rate, or Capped Interest Rate.

If the wholesale interest rate increases, so does the floating interest rate, and vice versa. It can take 1-2 months for an increase, or decrease, in the wholesale interest rate to filter through into the economy and impact on the floating interest rate offered by lenders.

The Reserve Bank Governor makes scheduled announcements of the Wholesale Interest rates. Often these rate changes are reported on the news and closely watched by those in the financial community because of their effect on the entire economy.

Pros - If you sign up for a Floating Interest Rate Mortgage and the floating interest rate decreases over the subsequent months and years, you benefit from cheaper mortgage repayments.

Most floating Interest Rate Mortgages enable you draw money back out. For example if you have paid $5000 off your floating interest mortgage, and want a new kitchen, you can draw that $5000 back out and use it for house improvements.

Most Floating Interest Rate Mortgages can be paid off at a quicker rate without penalty. For example if you earn an unexpected $5000 you can use it to pay $5000 lump sum off your floating mortgage, and not be penalised for prompt payment.

Cons - If you sign up for a Floating Interest Rate Mortgage and floating interest rate rises then it costs you more in extra interest repayments.

Pros - A Fixed Interest Rate Mortgage provides certainty regarding the size of monthly repayments. The Fixed Interest Rate is often lower that the Floating Interest Rate and the floating rate has to fall quite an amount before the borrower is worse off.

If the floating interest rate rises during the term of a fixed interest mortgage, the borrower saves money.

Cons - If the Floating Interest Rate were to decrease to well below your fixed interest rate, you would be disadvantaged with a fixed mortgage.

Most Fixed Interest Rate Mortgages cannot be paid off faster than the agreed term without a financial penalty. If you earn an unexpected $5000 you may want to pay a lump sum off your mortgage. With a Fixed Interest Rate Mortgage the bank may charge you a fee for early lump sum repayments.

At the end of the term of the Fixed Mortgage, the borrower has to re-finance. This might mean re-financing with another institution and also negotiate new borrowing terms.

For a comparison between mortgage lenders in New Zealand, see http://www.goodreturns.co.nz/section.php?CategoryID=200 for an up-to-date listing of fixed and floating interest rates.

There are a number of online Mortgage Calculators available on the Internet. Just plug in the numbers to get an idea of what your repayments may be. Online calculators allow you to quickly and easily compare options - different loan amounts, repayment frequencies and interest rates.

For example you can use a Mortgage Calculator to answer the following questions.

• How much will my repayments be?
• How much do my repayments change if I save up a bigger deposit?
• How much will my repayments be if I buy cheaper or more expensive house?
• How much will my repayments be if future Interest Rates increase 1%, 2 % or 3%?
• How much interest will I be paying to the bank over a 20-30 year period?

Some examples of mortgage calculators offered by the major banks:

National Bank:
http://www.nationalbank.co.nz/personal/calculators/homeloan.asp. This calculator is designed to give a general indication in relation to owner occupied homes only and allows you to work out how much you could potentially borrow from the National Bank.

In addition to these Mortgage Repayment costs you will also need to budget for additional house costs such as:

• Legal fees
• Council rates
• House insurance (structure) - usually the bank will require this before they will give you a loan in case of fire or natural disasters such as earthquakes or storms
• House insurance (contents) - optional
• House maintenance
• House renovations. These costs can be spread over a number of years.

Now draw up a budget that covers your income, expenditure and your loan repayments for the first year (you may need to re-visit this budget several times a year, and over several years).

• Household wages and salaries (net of tax)
• Other income - room rentals (if any), shares, dividends, interest

• Monthly loan repayments
• Annual property rates (divide by 12 for monthly value)
• Annual house and contents insurance (divide by 12 for monthly value)
• Annual house maintenance costs (divide by 12 for monthly value)
• Legal fees associated with purchasing your house (divide by 12 for monthly value)

• Utilities - electric power, gas, water, telephone
• Transport - car repayments, petrol, insurance, registration, warrant of fitness, servicing, tyres, battery
• Food and drink
• Clothing, shoes, hats, wet weather gear
• Personal - haircuts, entertainment, pocket money, vacations, birthdays
• Insurances - health insurance, life insurance,
• Medical - doctors visits, dentist visits
• School - fees, books, uniform, trips
• Household whiteware and chattels - up and coming purchases
• Debt - hire purchase payments, credit card payments

Prepare a balance sheet and determine if you have enough money to meet all expenses. If not, what can you do without? Still not enough - should you borrow less?