The five step guide to getting a mortgage

1. Work out how much you need to borrow
The first step is working out how much you need to borrow. Remember to factor in other costs, such as solicitor’s and application fees, and future expenses such as renovations.

2. How much can you borrow?
The next step is to work out how much a lender will lend you. This depends on two things: how much you can afford to repay, and the maximum a lender will lend on a particular property.

What you can afford to repay
Lenders want to be sure you will keep up with your repayments and still have enough disposable income left over to live on. Some say that your fixed payments (the mortgage repayments plus any other loan or hire purchase payments) should be no more than 30 to 40 percent of your gross income.

If you’re borrowing a high proportion of the purchase price, lenders will expect you to have more spare income so you can cope with any future uncertainties.

Lenders will also look for a cash deposit. The greater the deposit, the smaller your mortgage will be and the better you will be able to manage the repayments. That makes you a better lending proposition.

How much a lender will lend on a property
Many lenders will lend up to 95 percent of the value of a house, and some may even lend 100 percent if you have a large and reliable income. However many lend less for properties outside urban areas, and on apartments.

To work out how much a lender will allow you to borrow, ask them for a calculation (you’ll have to tell them your income, spending details and the property value). For a guide, use the Quick Mortgage calculator at www.sorted.org.nz.

3. Choice of interest rates
There are usually three interest rate options: fixed, floating and a mix of the two. With fixed interest rate loans, you pay a fixed interest rate that stays the same for a fixed period of time – usually between six months and five years.

With a floating rate, lenders will lift or lower the interest rate as interest rates in the wider market change. This means your repayments may go up or down.

It’s also possible to split a loan between fixed and floating rates. This lets you make extra repayments without penalty on the floating rate portion, while you currently get lower rates on the fixed portion.

Each has its advantages and disadvantages – so do your homework to work out which one best suits your circumstances.

4. Repaying your loan
Your lender will offer a range of repayment options. The most common type is a table loan. With this repayment option, most of your early repayments pay the interest, while most of the later repayments pay off the principal (the lump sum you borrowed). The option you choose will influence the total cost of your loan so it’s critical you understand the implications of each.

5. Striking a deal
By taking out a loan with your chosen lender, you’re giving them your business – so look at it as a deal where you can negotiate. When negotiating, try not to be distracted by giveaways, competitions or gimmicks which don’t have any effect on the loan itself. Focus on negotiating a loan that suits your circumstances that you can pay off as quickly as possible.

For more information about getting a mortgage, including checklists, easy to use calculators and comprehensive information, visit the Mortgage section at the Retirement Commission’s independent website www.sorted.org.nz.