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Striking a Mortgage Deal

Contributor:
Sorted.org.nz
Sorted.org.nz

The
ideal mortgage contract has benefits for both sides: you get a loan to
match your needs at a competitive price, and the lender gets some
long-term business. Look at it as a deal where you can negotiate.

Knowing what you want

You generally sort out with the lender the key parts of the deal
before you fill out the application form and before the lender formally
offers you a loan. The lender will have lots of helpful advice, but it
helps if you know when you start negotiating just what you want:

  • How much do you want to borrow? Remember, the lower the
    amount you borrow, the quicker you'll pay it off. If you need $147,000,
    then borrow that - don't borrow $150,000 just because it's a nice round
    figure. Lenders typically let you add to your loan your lawyer's and
    valuer's fees, and their own charges. But this means you'll be paying
    interest on that money. Pay the fees in cash if you can.
  • How long do you need the loan for? If you opt for the shortest period you can afford, you'll pay less interest overall. Use the Sorted.org.nz Quick mortgage calculator to help.
  • Should you go for a fixed interest rate, a floating rate, or a mix, this can have a huge impact on the cost of your loan.
  • Do
    you want flexibility to be able to draw down additional money in the
    future, or to make lump sum repayments on your loan? You could take a
    revolving credit account. Alternatively, you could apply for a table
    loan with a higher limit  say $150,000, and a term of 15 years.  But
    then only actually borrow $147,000 if that's all you need, and aim to
    repay it in a lot less than 15 years.
  • Match the repayment periods to pay periods if you're paid fortnightly, set fortnightly repayments.
  • You
    can negotiate on the application fee if there is one. Lenders will
    often waive it to get your business. Ask about any other useful
    benefits, such as a day-to-day bank account with no transaction fees.

The Sorted checklist gives you things to ask.

Once you've worked out exactly what sort of loan would suit you
best, it's time to fill out the application form. The documents you'll
need to show the lender include:

  • Proof of income. For wage and salary earners this could be
    pay slips or a letter from your employer stating your income. If you're
    self employed, you'll need to provide one to three years accounts,
    depending on the lender. If you haven't been in business this long,
    they'll want to see your business plan and cash flow forecasts.
  • Up to date details of debts and expenses (it is often a good idea to take a copy of the budget that you have done on Sorted).
  • A copy of the sale and purchase agreement for the property.
  • A registered valuers report
  • If it's a lender you haven't used before, they'll want to see identification such as your driver's licence or passport.
  • A
    copy of the ratings valuation may be enough if you're borrowing less
    than 80 percent of the value; if you're borrowing more, you may be
    asked to get a valuation from a registered valuer. The latter needs to
    be addressed to the lender.

Fill out the forms completely and accurately. Ask your broker or
lender to help with any question you don't understand. It's not a good
idea to leave blank spaces on any form which you sign.

Credit history

Lenders will check with a credit company to see whether you've
failed to repay any loans or other debts. If you haven't kept up with
bills in the past, lenders may ask you to provide a much higher
deposit, so they reduce their own risk. They may turn you down.

You can check your own file with credit agencies and point out
errors if there are any. Baycorp Advantage is the biggest company, but
there are others.

Student loans

Your student loan and the repayments you make on it are counted
along with your other debts such as hire purchases, credit card debt or
car loans, when lenders work out how big a mortgage you can afford to
repay. A large student loan will reduce the amount you can borrow to
buy a house. Lenders are particularly cautious if you want to borrow
over 80 percent of the property value because their research shows the
risks of the mortgage not being repaid increase above that point.

Guarantors

You may find that you will only be offered a loan if you provide a
'guarantor' - someone else who signs a legal agreement that they will
repay the loan (or part) if you don't.

A lender will usually ask that a guarantor puts up an asset of their
own, such as their home, as security for the loan. This means that if
you don't keep up the payments, the guarantor's house could be sold to
meet the shortfall. It is crucial that guarantors get independent legal
advice.

Mortgage protection insurance

You may be offered this insurance, which makes the mortgage
repayments for you if you die, become disabled or are made redundant
the details vary between policies.

It's usually not compulsory, but it's worth considering, especially if you have only one income or dependents.

If you just want insurance which will pay out if you die, you could
consider term life insurance. If you want more comprehensive cover
should illness or injury stop you working, consider income protection
insurance.

In either case, shop around. Your lender may have a related
insurance company but that won't necessarily be the cheapest. Get a
price from your lender for the cover you need and then ask a couple of
other insurance companies.

The lawyer

Choose a lawyer yourself to do the property transaction and the
mortgage documentation: don't just take the one recommended by someone
else involved in the house or home loan deal. It is important that the
lawyer is independent and acting only for you.

It's a good idea to ask the lawyer to write or update your will at
the same time. Some will do this for free, or for a reduced fee, when
you ask them to do the legal work on your home and mortgage.

Content provided by Sorted.org.nz, Your Independent Money Guide.

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