What is a mortgage? A plain-English guide for NZ borrowers
What is a mortgage? It is a loan from a bank or other lender to buy property, with the property itself held as security. You borrow an amount (the principal), pay interest on it, and repay it over a set term, commonly up to 30 years. If you stop paying, the lender can sell the property to recover what it’s owed. That is the mortgage definition in one go, and the rest of this post fills in the detail.
Illustrative example: $500,000 loan, 5.00% p.a., 30-year term, principal and interest, monthly repayments. Real rates and terms vary by lender.
Most of the people I talk to know they need a mortgage. Far fewer have had anyone explain how one works. The jargon doesn’t help.
So here is what is a mortgage, answered, with the mortgage loan explained the way I’d explain it across a table.
What is a mortgage made of? Principal, interest and term
- Principal: the amount you borrow.
- Interest: the cost of borrowing it, charged as a rate per year on what you still owe.
- Term: how long you take to repay. Terms of up to 30 years are common, and the interest rate is set for shorter periods within it.
Each repayment covers that period’s interest first, and the rest reduces the principal. Early on most of it is interest. Here’s a worked example on a $500,000 loan at 5.00% over 30 years:
| Amount | |
|---|---|
| Monthly repayment | $2,684 |
| First month: interest | $2,083 |
| First month: off the principal | $601 |
| Balance after 1 year | about $492,600 |
| Total interest over 30 years | about $466,300 |
That surprises people. After a year you’ve paid about $32,200 and cut the loan by only about $7,400. Try your own numbers in the mortgage repayment calculator.
Fixed vs floating
A fixed rate stays the same for a set period, so your repayment is predictable. A floating (variable) rate moves with the market, and usually lets you repay extra without a fee. Many people split their loan across both. Breaking a fixed rate early can cost a fee. I compare the two in fixed or floating mortgage.
Revolving credit and offset
These are floating features that cut your interest. With a revolving credit, your pay goes into the loan and you draw it back out as needed. With an offset, your savings sit in a linked account and are netted against the loan when interest is worked out. Both suit disciplined savers. See what a revolving credit mortgage is for how it works.
Want a mortgage explained against your own numbers? I’ll show you what you could borrow, and what it costs.
Book a free mortgage chat →What is a mortgage deposit and LVR?
Lenders measure your loan against the property’s value. That’s the loan-to-value ratio (LVR). Borrow $500,000 on a $625,000 home and your LVR is 80%, which means a $125,000 (20%) deposit. Deposit is what you put in, and the smaller it is, the higher the LVR.
Banks can lend only a limited share of new owner-occupier loans above 80% LVR (25% under current Reserve Bank settings), so low-deposit borrowers face tighter checks and often a low-equity margin or fee. Lower deposits are possible through the Kāinga Ora First Home Loan, BNZ and YouOwn at 5%, and several lenders at 10%. Start with my first home buyers page.
What a mortgage broker does
A broker is an adviser who deals with many lenders instead of one. I look at your income, spending, deposit and goals, work out which lenders fit, compare the options, and handle the application through to settlement. I serve clients across New Zealand, remotely.
Common questions
What is a mortgage in simple terms?
What is the difference between a mortgage and a loan?
How long is a typical mortgage term in NZ?
Do I need a deposit for a mortgage in NZ?
Read next
Repayment calculator
Work out your own repayments.
Fixed or floating
Which rate type suits you.
First home buyers
Deposits, grants and how to start.
Talk it through with Yatin. Free, no obligation, and usually one phone call. I work with clients across New Zealand, remotely.
Book a free chat →Or call 022 064 7770
This article is general information only and isn’t personalised financial advice. Figures are illustrative and based on the assumptions shown. Mortgage Sense is a trading name of Yatin Kainth, a Financial Adviser (FSP1007497) providing advice under the Mortgage Managers licence (North West Group Holdings Ltd, FSP682791). See the Disclosure Statement.
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