Expenses factored into home loan costs

Property value: This is the total amount you’ll pay for a home. The property value directly impacts your home loan amount, monthly repayments, and overall costs. When buying a property, consider other expenses like legal fees, council rates, and home insurance to remain within your budget.

Deposit: When buying a home, you’ll need to pay a percentage of the total property value upfront, otherwise known as a deposit. A higher deposit reduces your loan amount and lowers monthly repayments, while a smaller deposit increases these these costs.

Interest rate: An interest rate is the percentage of the loan amount that the lender will charge you for borrowing money, affecting your monthly repayments. A lower rate reduces your total loan cost, while a higher rate increases it.

Loan term: The loan term is the time it will take to repay your home loan. You can select loan terms anywhere between 10-30 years. A shorter term will have higher monthly repayments but less interest paid overall. However, a longer term lowers home loan repayments and increases total interest costs.

LMI: Lender's mortgage insurance is typically required if your deposit amount is less than 20% when purchasing a home. This protects the lender in case you aren't able to repay your loan. LMI is typically added to your monthly repayments, but it can also be paid upfront.

Home insurance: Lenders may require you to have home insurance to cover the structure of the property against damage from fire, floods, storms, or other disasters. This is requirement is typically a condition of the loan, but you can choose different levels of cover and cost based on your property.

Mortgage payment formula

This formula helps you figure out your monthly home loan repayments based only on the loan amount and interest rate. It does not include any additional costs such as council rates, home insurance, or any fees that may increase your total monthly payment.

Manually calculate your monthly home loan repayments with this formula:

Here’s the breakdown:

M = Monthly repayments:
This is what you’re solving for. To get started, gather your loan details. These factors will determine how much you'll repay each month.

P = Loan amount:
This is the loan balance, or the total amount that you still owe on your loan. Your loan balance directly impacts your monthly repayments, interest costs, and home equity. You'll build more ownership in your property as the balance decreases.

r = Monthly interest rate:
The loan interest rate is an annual rate that will be paid monthly over the course of the year. To find the monthly interest rate, divide the annual percentage by the number of months in a year. For example, if your annual interest rate is 5%, this would look like 0.05/12 = 0.004167.

n = Number of repayments:
This is the total number of repayments you will make over the life of your loan. To find the total amount, multiply your loan term in years by 12. For example, if your loan term is 30 years, this would look like 30x12 = 360. This means that you will make a total of 360 repayments throughout your loan term.

Common home loan options

Home loans are determined by their interest rate structure, such as fixed or variable loans, or their repayment method, like variable (principal and interest) or interest-only. Common home loan types include fixed-rate, floating-rate, and split-rate loans.

Home loan repayment options

Home loan repayment types refer to the different methods of repaying the loan.

Principal and interest repayment: A principal and interest loan is a home loan where your monthly repayments will cover both the principal and interest. This interest rate is variable, meaning that it will change over time, which can cause monthly repayments to fluctuate. This home loan is meant for buyers who want the loan to be repaid in full by the end of the term.

Interest-only repayment: Interest-only home loans require that you only pay the interest each month, while the loan amount remains unchanged. The interest-only period lasts around 1 to 5 years, and the loan will revert back to a principal and interest loan unless you apply for another interest-only period.

Home loan interest options

This is how the interest rate will be applied to the loan, affecting whether the rate will remain the same or fluctuate throughout the term.

Fixed-rate loan: In a fixed-rate loan, the interest will remain the same for a set period, typically 1 to 5 years. Because of this, monthly repayments remain consistent and predictable. When the set period is over, you must choose to refinance to secure a new fixed deal. Otherwise, the loan will revert to the variable rate.

Floating-rate loan: A floating-rate loan is a home loan where the interest rate changes over time, typically in response to the Reserve Bank of New Zealand's (RBNZ) cash rate. This means that your monthly repayments can increase or decrease depending on rate changes.

Split-rate loan: A split-rate loan is a combination of fixed-rate and variable-rate loans. A portion of the loan is set at a fixed interest rate, while the other portion is set at a variable rate. This type of loan offers balance between the flexibility of a variable rate and the certainty of a fixed rate.

Common purchase costs when buying property

Council and water rates: Council and water rates are a local government tax based on the value of your property. It helps fund waste collection, road maintenance, parks, libraries, and other community services.

Property appraisal fee: Before you purchase property, you may want to hire a professional appraiser to assess the condition and value of the home. While this is optional, it is recommended to help you ensure that the property value is accurate. Fees may vary depending of the type of survey conducted.

Legal fees: Legal fees refer to the costs paid to a licensed conveyancer for handling the legal aspect of buying a property. These fees typically cover property searches, contract review, title transfer, and handling the transfer of funds.

Loan establishment fee: This is a one-time fee charged by the lender to cover the cost of setting up a loan. This typically covers processing the application, preparing loan documents, and conducting property valuations.

Next steps after calculating your home loan repayments

After you've estimated your home loan repayments, follow these steps to move forward with your property purchase.

Step 1: Compare home loan options, interest rates, and fees from different sources to find the best deal for your needs.

Step 2: Get pre-approved for a loan. This is a conditional approval from a lender that gives you an estimate of how much you can borrow.

Step 3: Start shopping for a home. Once you find a home, make an offer through the real estate agent and negotiate the best deal with the seller.

Step 4: Once your offer is accepted, you can formally apply for a home loan. The lender will check your finances and arrange a property valuation to make sure that the home is worth the loan amount.

Step 5: Hire a conveyancer. They will handle the legal checks, property searches, contract preparation, and make sure there are no legal issues with the home.

Step 6: Exchange contracts and pay your deposit. Once legal checks are complete, you'll pay the deposit and make the sale legally binding.

Step 7: On completion day, the remaining funds are transferred and your conveyancer registers the property in your name.