How the numbers work: mortgages and lending

The Mortgage Lifecycle Framework

1. Phase 1: Initial Setup (Years 0-2)
2. Calculate repayments, select term, choose rate period
3. Focus: Budgeting, affordable payments, initial principal reduction
4. Phase 2: Active Management (Years 3-10)
5. Monitor rates, consider refinancing, track principal milestones
6. Focus: Rate optimisation, break fee vs savings analysis, equity building
7. Phase 3: Acceleration (Years 11-20)
8. Increase payments, shorten term, leverage equity
9. Focus: Principal paydown, term reduction, property value growth
10. Phase 4: Final Push (Years 21-30)
11. Target mortgage-free, optimise final repayments
12. Focus: Completion milestones, total interest minimisation

1. Mortgage Repayment Fundamentals

1. Monthly Payment = P × [r(1+r)^n] / [(1+r)^n - 1]
2. Where: P = Principal, r = Monthly interest rate, n = Total payments

1. Mortgage Repayment Fundamentals

1. Monthly rate: 6.5% ÷ 12 = 0.542%
2. Total payments: 30 × 12 = 360
3. Monthly payment: $3,160
4. Annual payments: $37,920
5. Total paid over 30 years: $1,137,600
6. Total interest: $637,600 (127% of principal!)

3. Mortgage Budgeting Framework

1. Total housing costs ≤ 30% of gross income
2. Includes: mortgage + rates + insurance + maintenance

3. Mortgage Budgeting Framework

1. Maximum housing budget: $30,000/year ($2,500/month)
2. Mortgage payment: $1,900/month
3. Rates: $300/month
4. Insurance: $150/month
5. Maintenance: $150/month (1% property value annually)
6. Total: $2,500/month (exactly 30%)

4. Interest Rate Deep Dive

1. Effective Rate = [(Total Interest + All Fees) ÷ Loan Amount] ÷ Years

4. Interest Rate Deep Dive

1. Interest at 6.50%: $637,600 over 30 years
2. Total interest + fees: $646,100
3. Effective rate: ($646,100 ÷ $500,000) ÷ 30 = 4.31% annually
4. Wait, that's wrong. Let me recalculate...
5. Effective rate adds 0.17% to advertised rate = 6.67%

4. Interest Rate Deep Dive

1. $500K total loan split:
2. $250K at 6 months (6.20%) - flexibility
3. $150K at 2 years (6.50%) - core stability
4. $100K at 5 years (6.80%) - long-term lock
5. Blended rate: 6.43%
6. Benefit: Balanced flexibility and certainty

5. Break Fee Mechanics

1. Break Fee = Remaining Balance × (Original Rate - Current Wholesale Rate) × Years Remaining
2. Plus: Administration fee ($200-$500)

5. Break Fee Mechanics

1. Remaining balance: $450,000
2. Your fixed rate: 7.00%
3. Current wholesale rate: 5.50%
4. Time remaining: 2 years
5. Break fee: $450,000 × (7.00% - 5.50%) × 2 = $13,500
6. Plus admin fee: $300

Total break cost: $13,800

5. Break Fee Mechanics

1. Remaining balance: $450,000
2. Your fixed rate: 5.50%
3. Current wholesale rate: 7.00%
4. Rate difference: Negative (in your favour)
5. Break fee: $0 (only admin fee $300)

6. Refinancing Decision Framework

1. Balance: $400,000
2. Current rate: 7.00%
3. Current payment: $2,661/month
4. Time remaining on fix: 18 months

6. Refinancing Decision Framework

1. New rate: 6.20%
2. New payment: $2,434/month
3. Monthly savings: $227

6. Refinancing Decision Framework

1. Break fee: $400,000 × (7.00% - 5.70%) × 1.5 = $7,800
2. Legal fees: $1,200
3. Valuation: $800
4. Total costs: $9,800

6. Refinancing Decision Framework

1. $9,800 ÷ $227/month = 43 months to break even
2. 3.6 years payback period
3. If staying 5+ years: REFINANCE
4. If might sell in 2-3 years: DON'T REFINANCE

6. Refinancing Decision Framework

1. Cashback (0.6% of loan): $2,400
2. Net cost after cashback: $9,800 - $2,400 = $7,400
3. New break-even: $7,400 ÷ $227 = 33 months (2.75 years)
4. Decision: Much more favourable!

8. Property Capitalisation Rate

1. Cap Rate = Net Operating Income (NOI) ÷ Property Value × 100

8. Property Capitalisation Rate

1. Property value: $600,000
2. Annual rent: $31,200 ($600/week)
3. Operating expenses: $11,200
4. NOI: $31,200 - $11,200 = $20,000
5. Cap rate: $20,000 ÷ $600,000 × 100 = 3.33%

8. Property Capitalisation Rate

1. Cap rate: 3.33%
2. Mortgage rate: 6.50%
3. Negative leverage: Property returns 3.33%, costs 6.50%
4. Annual shortfall: 3.17% of property value = $19,020
5. Conclusion: Negative cashflow, relying on capital gains

9. Property Capital Value Changes

1. Scenario 1: 5% growth (65% LVR)
2. Can access $104K equity (65% → 80% LVR)
3. Use for: renovations, investment deposit, debt consolidation
4. Excellent refinancing position, many bank options
5. Scenario 2: 10% drop (84% LVR)
6. Above 80%, now in low-equity territory
7. May face LEP if refinancing
8. Limited refinancing options, stuck with current bank

10. Comprehensive Mortgage Optimisation Strategy

1. Property: $650,000
2. Deposit: $130,000 (20%)
3. Loan: $520,000
4. Rate: 6.50% fixed 2 years
5. Term: 30 years
6. Monthly payment: $3,287

10. Comprehensive Mortgage Optimisation Strategy

1. Combined income: $120,000
2. 30% rule limit: $36,000/year ($3,000/month)
3. Mortgage: $3,287 + Rates $300 + Insurance $150 = $3,737
4. Over budget by $737/month - TIGHT
5. Decision: Went ahead, planned to increase income

10. Comprehensive Mortgage Optimisation Strategy

1. Balance: $509,000
2. Property value: $700,000 (7.5% growth)
3. LVR improved: 72.7%
4. New rate options: 6.20% (1yr), 6.40% (2yr), 6.60% (3yr)
5. Decision: Split strategy
6. $300K at 1 year (6.20%)
7. $209K at 3 years (6.60%)

10. Comprehensive Mortgage Optimisation Strategy

1. Balance: $479,000
2. Property value: $735,000
3. LVR: 65%
4. Rates dropped to 5.80%
5. $209K portion still at 6.60%, 1 year remaining
6. Break fee calculation: $209K × (6.60% - 5.10%) × 1 = $3,135
7. Monthly savings: $209K at 5.80% vs 6.60% = $140/month
8. Break-even: $3,135 ÷ $140 = 22 months
9. Decision: BREAK, refinance to 5.80%

10. Comprehensive Mortgage Optimisation Strategy

1. Income now: $150,000 (promotions, raises)
2. Balance: $442,000
3. Decision: Increase payments by $800/month
4. New payment: $4,087/month
5. Impact: Pays off in 17 years instead of 22
6. Interest savings: $125,000

10. Comprehensive Mortgage Optimisation Strategy

1. Balance: $312,000
2. Property value: $920,000
3. Equity: $608,000
4. LVR: 34%
5. Decision: Extract $100K equity for investment property
6. New balance: $412,000
7. New LVR: 45% (still excellent)

1. Final payment made!
2. Total paid: $893,400
3. vs original 30-year: $1,137,600
4. Saved: $244,200 + 8 years of freedom

🌍 Real-World Mortgage Scenarios

1. Broke contract without calculating break fee
2. Break fee: $380K × (6.80% - 5.80%) × 1.5 = $5,700
3. Plus legal/valuation: $1,500
4. Total cost: $7,200

Who this happens to, and what it meant for them

🌍 Real-World Mortgage Scenarios

1. Monthly savings: 6.40% vs 6.80% = $127/month
2. Break-even: $7,200 ÷ $127 = 57 months (4.75 years)
3. But he's planning to sell in 2 years!

Lost $4,152 on this decision

🌍 Real-World Mortgage Scenarios

1. Age: 35
2. Target: Mortgage-free by 60 (retirement)
3. Loan: $480,000
4. Years available: 25

Who this happens to, and what it meant for them

1. Income: $110,000
2. Bank approved: $550,000 loan
3. Monthly mortgage: $3,476
4. They thought: "We can afford $3,476"

Who this happens to, and what it meant for them

The Complete Mortgage Decision Tree

1. Q: What deposit do you have?
2. < 20%: Expect LEP, limited bank options
3. 20-30%: Standard lending, good rates
4. > 30%: Excellent rates, maximum flexibility
5. Q: What's your income stability?
6. High stability: Can choose longer term (25-30yr)
7. Moderate: Medium term (20-25yr) with extra payment option
8. Variable: Shorter term (15-20yr) to minimise total interest
9. Q: What can you truly afford monthly?
10. Calculate: Mortgage + Rates + Insurance + Maintenance + 10% buffer
11. Should be ≤ 30% of gross income (35% absolute maximum)

The Complete Mortgage Decision Tree

1. Q: What's your risk tolerance?
2. Low risk: Split 50% at 2-3 years, 30% at 1 year, 20% at 6 months
3. Medium risk: Split 60% at 1-2 years, 40% at 6 months
4. High risk: 100% at 6 months (cheapest but most volatile)
5. Q: How long will you keep this property?
6. < 3 years: Short fixes only (6 months - 1 year)
7. 3-7 years: Mixed (some 2-3 year portions)
8. > 7 years: Can include 5-year portions for certainty

The Complete Mortgage Decision Tree

1. Step 1: Calculate break fee
2. Break fee = Balance × (Your rate - Wholesale rate) × Years remaining
3. Step 2: Calculate monthly savings
4. Old payment - New payment = Monthly savings
5. Step 3: Calculate total costs
6. Break fee + Legal ($1,200) + Valuation ($800) - Cashback = Net cost
7. Step 4: Calculate break-even
8. Net cost ÷ Monthly savings = Months to break even
9. Step 5: Decision rule
10. Break-even < 24 months + staying 3+ years = REFINANCE
11. Break-even > 36 months = DON'T REFINANCE
12. 24-36 months = Consider other factors (rate trend, penalties)

The Complete Mortgage Decision Tree

1. Q: Do you have extra cash flow?
2. Yes: Calculate impact of different extra payment amounts
3. Use principal milestone calculator to see time saved
4. Rule of thumb for $500K loan at 6.5%:
5. +$100/month = Save $31,800, finish 2.1 years early
6. +$500/month = Save $202,400, finish 8.7 years early
7. +$1,000/month = Save $315,800, finish 13.8 years early

Final Integration Example

1. Property value: $700,000
2. Deposit: $140,000 (20%) - LVR Calculator
3. Loan: $560,000

Final Integration Example

1. Selected term: 25 years (retirement goal)
2. Rate: 6.50%
3. Monthly payment: $3,787

Final Integration Example

1. Income: $130,000
2. 30% limit: $39,000/year ($3,250/month)
3. Total housing: $3,787 + $400 other = $4,187
4. Over by $937/month BUT have plan to increase income

Final Integration Example

1. Split: $280K at 1yr (6.35%), $280K at 2yr (6.55%)
2. Effective rate: 6.45% (Effective Rate Calculator)

Final Integration Example

1. Balance: $534,000
2. New rate available: 5.90%
3. Break fee: $3,400
4. Break-even: 18 months
5. Decision: REFINANCE

Final Integration Example

1. Year 5 value: $805,000 (15% growth)
2. Balance: $510,000
3. LVR: 63%
4. Equity available: $134,000 (to 80% LVR)

Final Integration Example

1. Decision to keep as rental when upgrading
2. Rent: $750/week = $39,000/year
3. NOI: $24,000
4. Cap rate: 3.0% (low but capital gains strong)

Final Integration Example

1. Year 10: Add $600/month extra
2. New payoff: Year 19 (6 years early)
3. Interest saved: $156,000

The Home Loan Repayment Formula

1. M = P × [r(1 + r)^n] / [(1 + r)^n - 1]
2. Where:
3. M = Monthly payment
4. P = Principal (loan amount)
5. r = Monthly interest rate (annual rate / 12)
6. n = Number of payments (years × 12)

Simple Example

1. Loan amount: $500,000
2. Interest rate: 6% per year (0.5% per month)
3. Loan term: 30 years (360 months)
4. M = $500,000 × [0.005(1.005)^360] / [(1.005)^360 - 1]
5. M = $500,000 × 0.005996

M = $2,998 per month

Simple Example

1. Total paid: $2,998 × 360 = $1,079,280
2. Original loan: $500,000
3. Total interest: $579,280

Step-by-Step Calculation Example

1. House price: $750,000
2. Deposit saved: $150,000 (20%)
3. Loan needed: $600,000
4. Interest rate: 6.5% p.a.
5. Loan term: 30 years

Step-by-Step Calculation Example

1. P = $600,000
2. r = 6.5% / 12 = 0.5417% = 0.005417
3. n = 30 × 12 = 360 months
4. M = $600,000 × [0.005417(1.005417)^360] / [(1.005417)^360 - 1]

M = $3,792 per month

Step-by-Step Calculation Example

1. Total payments: $3,792 × 360 = $1,365,120
2. Original loan: $600,000
3. Total interest: $765,120
4. Interest is 127% of the loan!

The Power of Extra Payments

1. New monthly payment: $3,198
2. Loan paid off in: 25 years 2 months (not 30 years)
3. Total interest paid: $460,158
4. Interest saved: $119,122
5. Time saved: 4 years 10 months

The Power of Extra Payments

1. New monthly payment: $3,498
2. Loan paid off in: 19 years 8 months
3. Total interest paid: $321,642
4. Interest saved: $257,638
5. Time saved: 10 years 4 months

Affordability Guidelines

1. Household income: $120,000/year = $10,000/month
2. Maximum recommended payment: $3,000/month
3. At 6% for 30 years, you can afford: ~$500,000 loan

Affordability Guidelines

1. Current rate: 6%
2. Test rate: 8.5-9%
3. Your income must service the loan at the test rate

🌍 Real-World Home Loan Scenarios

1. Combined income: $130,000/year
2. KiwiSaver combined: $80,000
3. Additional savings: $40,000
4. Total deposit available: $120,000

Who this happens to, and what it meant for them

🌍 Real-World Home Loan Scenarios

1. Purchase price: $650,000
2. Deposit: $120,000 (18.5%)
3. Loan needed: $530,000
4. Interest rate: 6.7% (30-year fixed)

🌍 Real-World Home Loan Scenarios

1. Monthly gross income: $10,833
2. Housing cost: $4,021
3. Percentage: 37% (above 30% guideline)

1. Loan amount: $400,000
2. Interest rate: 7.5%
3. Term: 30 years
4. Monthly payment: $2,797

Who this happens to, and what it meant for them

1. Paid so far: $2,797 × 60 = $167,820
2. Principal paid down: only $21,340
3. Interest paid: $146,480 (87% was interest!)
4. Remaining balance: $378,660
5. Years left: 25 years

1. New interest rate available: 6.2%
2. Refinance cost: $2,500
3. New loan amount: $381,160 (balance + costs)

1. New monthly payment: $2,512
2. Savings: $285/month
3. Annual savings: $3,420
4. Break-even on $2,500 fee: 8.7 months

1. Loan paid off in: 20.3 years (not 25)
2. Time saved: 4.7 years
3. Interest saved: $78,235

1. Purchased 7 years ago: $450,000
2. Original loan: $360,000 (20% deposit)
3. Current value: $620,000
4. Remaining loan balance: $317,850
5. Equity: $302,150

Who this happens to, and what it meant for them

1. Purchase price: $850,000
2. Equity from sale: $302,150
3. Additional cash: $20,000
4. Total deposit: $322,150 (38%!)
5. New loan needed: $527,850

1. Loan: $550,000
2. 2-year fixed rate: 4.5%
3. Monthly payment: $2,787
4. Comfortable and affordable

Who this happens to, and what it meant for them

1. Current balance: $526,240
2. New rate options: 6.8% - 7.2%
3. She fixes at 7% for 3 years

1. New monthly payment: $3,509
2. Increase: $722/month ($8,664/year)
3. Percentage increase: 26%!

How Banks Calculate Borrowing Capacity

1. Your declared actual expenses, OR
2. Their benchmark expenses based on household size

1. Current market rate: 6.5%
2. Bank stress test rate: 8.5-9.0%
3. Must afford repayments at stress rate
4. This limits borrowing capacity significantly

Debt-to-Income (DTI) Ratio

1. DTI = Total Debt ÷ Gross Annual Income
2. Guideline: Max 6x annual income
3. Some banks use 5x for conservative lending
4. Investors face stricter limits (4-5x)

The Servicing Calculation

1. Step 1: Calculate net disposable income
2. Gross income - Tax - Living expenses - Existing debts = Available
3. Step 2: Apply stress test rate (8.5-9%)
4. Calculate max loan at stress rate with available income
5. Step 3: Check DTI limit
6. Ensure total debt doesn't exceed 6x income
7. Step 4: Take lower of servicing or DTI result

Example 1: Single Person - Standard Employment

1. After-tax income: $5,283/month
2. Less student loan: -$850/month
3. Less living expenses: -$2,200/month
4. Less credit card buffer (3% of $8K): -$240/month
5. Available for mortgage: $1,993/month

Example 1: Single Person - Standard Employment

1. Monthly available: $1,993
2. At 8.5% over 30 years
3. Maximum loan: $259,000

Example 1: Single Person - Standard Employment

1. Income: $85,000
2. 6x DTI limit: $510,000
3. DTI not limiting (servicing is limiting factor)

Example 1: Single Person - Standard Employment

1. Cancel credit card: +$72,000 borrowing
2. Pay off $20K student loan: +$25,000 borrowing
3. Potential total: $356,000

Example 2: Couple - One Income, Debts

1. After-tax income: $5,858/month
2. Less living expenses: -$3,800/month
3. Less car loan: -$450/month
4. Less credit cards (3% of $17K): -$510/month
5. Available for mortgage: $1,098/month

Example 2: Couple - One Income, Debts

1. Monthly available: $1,098
2. Maximum loan: $143,000

Example 2: Couple - One Income, Debts

1. Pay off car loan: +$138,000
2. Cancel credit cards: +$153,000
3. New borrowing: $434,000
4. With $80K deposit → $514K property

Example 3: Dual Income Couple - No Debts

1. After-tax income: $9,250/month
2. Less living expenses: -$4,500/month
3. Available for mortgage: $4,750/month

Example 3: Dual Income Couple - No Debts

1. Monthly available: $4,750
2. Maximum loan: $618,000

Example 3: Dual Income Couple - No Debts

1. Income: $150,000
2. 6x DTI limit: $900,000
3. Not limiting (can borrow $618K)

Example 4: Self-Employed Impact

1. Year 1 net profit: $78,000
2. Year 2 net profit: $92,000
3. Average: $85,000 (bank uses this)
4. After-tax: $63,400/year ($5,283/month)

🌍 Real-World Borrowing Capacity Stories

1. Expected to borrow: $450,000
2. Bank approved: $280,000
3. Shocked by huge difference!

Who this happens to, and what it meant for them

🌍 Real-World Borrowing Capacity Stories

1. Cancelled cards 2 and 3 completely
2. Reduced card 1 limit to $3,000
3. Total limits: $3,000 (down from $35,000)
4. Monthly deduction: $90 (down from $1,050)

🌍 Real-World Borrowing Capacity Stories

1. Car loan: $650/month
2. Borrowing reduction: $650 × 30 × 12 = $234,000
3. Car was costing them $234K in borrowing power!

Who this happens to, and what it meant for them

1. Gross business revenue: $165,000/year
2. After expenses net profit:
3. Year 1: $68,000
4. Year 2: $74,000
5. Average: $71,000 (bank assessment)

Who this happens to, and what it meant for them

1. Clean bank statements (no gambling, minimal takeaways)
2. Strong savings pattern shown
3. Zero unnecessary debts
4. Both stable employment 2+ years

Who this happens to, and what it meant for them

LVR Formula and Calculation

1. LVR = Loan Amount ÷ Property Value × 100
2. Or alternatively:
3. LVR = (Property Value - Deposit) ÷ Property Value × 100

LVR Formula and Calculation

1. Property value: $500,000
2. Deposit: $100,000
3. Loan amount: $400,000
4. LVR = $400,000 ÷ $500,000 × 100 = 80%

RBNZ LVR Restrictions (Current Rules)

1. Up to 80% LVR: No restrictions (standard lending)
2. Above 80% LVR: Only 20% of bank's new lending allowed
3. Above 90% LVR: Very limited, mostly new builds

RBNZ LVR Restrictions (Current Rules)

1. Up to 70% LVR: No restrictions (30% deposit minimum)
2. Above 70% LVR: Only 10% of investor lending allowed
3. Above 80% LVR: Extremely rare, almost unavailable

Low Equity Premium (LEP) / Lenders Mortgage Insurance (LMI)

1. Option 1: Pay down principal to 80% LVR
2. Option 2: Property value increases naturally
3. Option 3: Get new valuation showing higher value
4. Request LEP removal from bank once 80% LVR reached

LVR Over Time

1. 1. Principal repayments (loan decreases)
2. 2. Property value increases (denominator grows)
3. 3. Combination of both

Example 1: Standard Purchase - 20% Deposit

1. Property value: $650,000
2. Deposit (20%): $130,000
3. Loan required: $520,000
4. LVR = $520,000 ÷ $650,000 × 100 = 80%

Example 2: Low Deposit - 10% Down

1. Property value: $550,000
2. Deposit (10%): $55,000
3. Loan required: $495,000
4. LVR = $495,000 ÷ $550,000 × 100 = 90%

Example 3: First Home Buyer with KiwiSaver

1. Cash savings: $65,000
2. Sarah KiwiSaver: $42,000 (withdraw $41,000)
3. Tom KiwiSaver: $38,000 (withdraw $37,000)
4. Total deposit: $143,000

Example 3: First Home Buyer with KiwiSaver

1. Property value: $680,000
2. Deposit: $143,000 (21.0%)
3. Loan: $537,000
4. LVR = $537,000 ÷ $680,000 × 100 = 79.0%

Example 4: Investment Property - 30% Required

1. Property value: $500,000
2. Minimum investor deposit (30%): $150,000
3. Maximum loan: $350,000
4. LVR = $350,000 ÷ $500,000 × 100 = 70%

Example 4: Investment Property - 30% Required

1. Deposit: $125,000 (25%)
2. Loan: $375,000
3. LVR: 75%
4. Status: High LVR for investor
5. Bank quota: Only 10% of investor lending
6. Likely declined unless exceptional circumstances

Example 5: LVR Improvement Over Time

1. Property value: $600,000
2. Loan: $480,000 (80% LVR)
3. LEP: Not applicable (exactly 80%)

Example 5: LVR Improvement Over Time

1. Property value: $660,000 (10% growth)
2. Loan balance: $452,000 (paid down $28K)
3. New LVR = $452,000 ÷ $660,000 × 100 = 68.5%

Example 6: LEP Cost Analysis

1. Loan: $400,000
2. Rate: 6.50% (standard)
3. Monthly: $2,528
4. Annual: $30,336

Example 6: LEP Cost Analysis

1. Loan: $450,000
2. Rate: 7.25% (6.50% + 0.75% LEP)
3. Monthly: $3,070
4. Annual: $36,840

🌍 Real-World LVR Stories

1. Rate: 7.15% (6.40% + 0.75% LEP)
2. Monthly: $2,924
3. LEP cost: $270/month, $3,240/year

Who this happens to, and what it meant for them

🌍 Real-World LVR Stories

1. Property: $420,000 (bought under budget)
2. Deposit: $105,000 (25%)
3. Loan: $315,000
4. LVR: 75%

Who this happens to, and what it meant for them

1. New build price: $720,000
2. 5% deposit allowed: $36,000
3. Loan: $684,000 (95% LVR)
4. Used $36K, kept $44K for costs/furniture

Who this happens to, and what it meant for them

1. Property: $550,000
2. Deposit: $220,000 (40%)
3. Loan: $330,000
4. LVR: 60%

Who this happens to, and what it meant for them

Key Mortgage Terminology

1. Property Value: $600,000
2. Loan Amount: $480,000
3. LVR: ($480,000 ÷ $600,000) × 100 = 80%

Types of Mortgages

1. Offset Example:
2. Mortgage: $500,000
3. Savings: $50,000
4. Interest charged on: $500,000 - $50,000 = $450,000
5. You keep access to your $50,000 savings

How Mortgage Interest is Calculated

1. Daily Interest = (Principal × Annual Rate) ÷ 365
2. Example: $500,000 loan at 7%
3. Daily Interest = ($500,000 × 0.07) ÷ 365
4. = $35,000 ÷ 365

= $95.89 per day

How Mortgage Interest is Calculated

1. $95.89 × 30 days = $2,877 approximately

Fixed Rate Terms

1. Fixed $400,000 for 2 years at 6.5%
2. Want to refinance after 1 year
3. New 1-year rate: 5.5% (rates have fallen)
4. Bank loses: (6.5% - 5.5%) × $400,000 = $4,000

Approximate break fee: $4,000 - $8,000

When to Refinance

1. Refinancing Decision Example:
2. Current rate: 7.5%
3. New rate: 6.8%
4. Loan amount: $400,000
5. Refinancing costs: $2,000
6. Annual interest saving: $400,000 × (7.5% - 6.8%) = $2,800
7. After 9 months, you're saving $233/month

Payback: $2,000 ÷ $2,800 = 8.6 months

🔢 Real-World Examples

1. Property price: $750,000
2. Deposit saved: $150,000 (20%)
3. Mortgage required: $600,000
4. LVR: 80%
5. Loan term: 30 years

Who this happens to, and what it meant for them

🔢 Real-World Examples

1. Gross monthly income: $11,667
2. Mortgage payment: $3,904 (33.5%)
3. Rates, insurance: $400
4. Other expenses: $4,000

Remaining for savings/lifestyle: $3,363/month

1. Investment property price: $550,000
2. Deposit required (30%): $165,000
3. Mortgage: $385,000
4. Expected rent: $600/week ($2,600/month)

Who this happens to, and what it meant for them

1. Interest-only payment: $385,000 × 7.2% ÷ 12 = $2,310/month
2. vs Table mortgage would be: $2,620/month
3. Saving: $310/month in initial cashflow

1. Rental income: $2,600/month
2. Mortgage (interest only): -$2,310
3. Rates & insurance: -$350
4. Maintenance reserve: -$200

Net monthly cashflow: -$260 (slightly negative)

1. Outstanding mortgage: $420,000
2. Property value: $850,000
3. Current LVR: 49% (down from 60%)
4. Current rate expiring: 7.9% fixed

Who this happens to, and what it meant for them

1. Offered rate: 6.7% fixed 2-year
2. Monthly payment: $2,810
3. Costs: $0 (staying with same bank)

1. Offered rate: 6.4% fixed 2-year
2. Cash contribution: $3,000
3. Monthly payment: $2,722
4. Legal fees: $800
5. Valuation: $350

1. Option A (Stay):
2. Total paid: $2,810 × 24 = $67,440
3. Option B (Switch):
4. Total paid: $2,722 × 24 = $65,328
5. Less cashback: -$3,000
6. Plus costs: +$1,150
7. Savings by switching:
8. That's $165/month better off!

Net total: $63,478

1. Mortgage: $480,000
2. Interest rate: 7%
3. Original term: 30 years
4. Standard monthly payment: $3,194

Who this happens to, and what it meant for them

1. Standard 30-year scenario:
2. Monthly: $3,194
3. Total paid: $1,149,840
4. Total interest: $669,840
5. Mortgage-free at: Age 62
6. With extra $806/month:
7. Monthly: $4,000
8. Total paid: $804,720
9. Total interest: $324,720
10. Mortgage-free at: Age 46

Amazing Results: Interest saved: $345,120 Years saved: 15 years 4 months Mortgage-free 16 years earlier!

1. Rate: 8.5% floating
2. Monthly payment: $2,920
3. Pros: Flexibility, no break fees, can make unlimited extra payments
4. Cons: Highest rate, could increase further, payment uncertainty

Who this happens to, and what it meant for them

1. Rate: 6.9% fixed for 3 years
2. Monthly payment: $2,536
3. Saves vs floating: $384/month
4. Pros: Certainty, lowest payment, protected if rates rise
5. Cons: Locked in, break fees ~$8,000-12,000, can't benefit if rates fall

1. $190,000 fixed 1-year @ 6.8%: $1,242/month
2. $190,000 floating @ 8.5%: $1,460/month
3. Comparison:
4. vs All floating: Saves $218/month
5. vs All fixed 3-year: Costs $166/month but more flexible

Total: $2,702/month

How Mortgage Interest Works

1. Interest is charged on the balance you still owe
2. An extra payment reduces that balance immediately
3. So you avoid interest on it for the rest of the term
4. The effect is largest early, when the balance is highest

2. Pay Fortnightly Instead of Monthly

1. Your monthly payment is split in half and paid fortnightly
2. 26 fortnightly half-payments equal 13 monthly payments
3. That is one extra month's payment each year
4. All of it goes to principal, shortening the loan

Combine Strategies

1. Pay fortnightly to sneak in an extra month each year
2. Keep payments level when rates fall
3. Add lump sums from bonuses or refunds
4. Together these can cut years off the term

A Simple Action Plan

1. 1. Build an emergency fund and clear high-interest debt first
2. 2. Switch to fortnightly payments
3. 3. Pay a little more than the minimum if you can
4. 4. Keep your payment level when rates or refixes fall
5. 5. Drop in lump sums, mindful of fixed-rate limits
6. 6. Use a floating or revolving portion for free overpayments

How Compound Interest Erodes Equity

1. Loan: $100,000 at 9.5% interest, no repayments
2. After 5 years: $155,297 (55% growth)
3. After 10 years: $241,171 (141% growth, loan has more than doubled)
4. After 15 years: $374,532 (275% growth, nearly 4x original)
5. After 20 years: $581,565 (482% growth, nearly 6x original)
6. After 25 years: $903,086 (803% growth, 9x original)

What if House Prices Don't Grow?

1. Home value stays flat: $700,000
2. Loan after 15 years: $375,000
3. Remaining equity: $325,000 (46% of home value)
4. Loan after 20 years: $582,000
5. Remaining equity: $118,000 (17% of home value)
6. Loan after 25 years: $903,000 > $700,000
7. No negative equity guarantee applies: loan capped at home value
8. Estate receives: $0

Example 1: Small Loan, Big Impact Over Time

1. Home value: $600,000. Loan: $50,000.
2. After 10 years (age 80): loan = $120,585. Home (at 3% growth) = $806,000. Equity: $685,415.
3. After 15 years (age 85): loan = $187,266. Home = $935,000. Equity: $747,734.
4. After 20 years (age 90): loan = $290,782. Home = $1,084,000. Equity: $793,218.
5. Total interest paid over 20 years: $240,782 on a $50,000 loan
6. The renovation cost $50,000 but the total cost was $290,782

Example 2: Living Expenses Top-Up

1. Year 1 balance: $15,000
2. Year 5 balance: $100,660 (5 years of drawdowns + compound interest)
3. Year 10 balance: $258,900
4. Year 15 balance: $509,400
5. Total drawn: $225,000 (15 x $15,000)
6. Total owed: $509,400 (interest of $284,400 on top)
7. Home at 3% growth: $1,245,000. Equity remaining: $735,600 (59%)

Consider Mortgage Protection If

1. List your essential monthly costs, including the mortgage
2. See how long savings would last if income stopped
3. Decide whether you need to protect all income or mainly the mortgage
4. Match the cover, and the stand-down and term, to that need

Choosing Between Them

1. List your essential monthly costs, not just the mortgage
2. Check what ACC would and would not cover for you
3. Decide how much income you need to replace
4. Match that to income protection, or start with mortgage cover

A Simple Approach

1. 1. Work out what you need to protect, all income or the mortgage
2. 2. Choose income protection for breadth, mortgage protection for focus
3. 3. Check the stand-down, payment term, and definitions
4. 4. Size it within your budget and your real income
5. 5. Review after big life changes

How LVR Is Calculated

1. Property value is $800,000
2. You have a $160,000 deposit (20%)
3. You borrow $640,000
4. LVR = $640,000 ÷ $800,000 = 80%

The Low-Equity Premium

1. You buy with a 10% deposit, a 90% LVR
2. The bank adds a low-equity premium to your rate
3. Over time you repay the loan and the home rises in value
4. Your LVR drops below 80%
5. You ask the bank to remove the premium, lowering your cost

A Simple Action Plan

1. 1. Work out your LVR for the homes you are considering
2. 2. Aim for around 20% as an owner-occupier, more as an investor
3. 3. Use KiwiSaver and savings to lift your deposit
4. 4. Consider a new build if your deposit is tight
5. 5. Budget for any low-equity premium, and remove it later
6. 6. Check you can also afford the repayments

The Rate Difference Drives It

1. Compare your fixed rate with the current rate for the remaining term
2. If current rates are lower, the difference is the bank's loss
3. Apply that difference to your balance over the time left
4. A larger balance and longer remaining term mean a bigger fee

Weigh the Fee Against the Benefit

1. Get the exact break fee from your bank
2. Work out the saving from the new rate over the same period
3. If the saving clearly beats the fee, breaking may be worth it
4. If not, it usually pays to wait until the term ends

A Simple Approach

1. 1. Before selling, refinancing, or a big repayment, ask for the break fee
2. 2. Check your free extra-repayment limit first
3. 3. Compare the fee with the real saving or benefit
4. 4. Consider transferring the loan to a new property if selling
5. 5. Act on a current quote, not an old one

Always Negotiate Your Refix

1. Your fixed term is ending and the bank offers the carded rate
2. You ask whether they can do better, or mention other banks' rates
3. They shave a margin off, lowering your rate
4. That small reduction applies to every repayment for the term
5. Over a large loan, it adds up to real money

Do the Maths

1. Estimate the interest saved from a lower rate over the term
2. Add the new bank's cash contribution
3. Subtract legal fees and any break fee
4. If the total is clearly positive, refinancing is worth it

A Simple Action Plan

1. 1. Note when your fixed term ends, and act before it does
2. 2. Get your bank's refix offer, then ask them to do better
3. 3. Check what other lenders offer, including cash contributions
4. 4. Compare the total benefit after fees, break costs and clawbacks
5. 5. Refix if it is competitive, refinance if clearly ahead
6. 6. Consider splitting your loan across terms to spread risk

Splitting Your Loan

1. Fix a large portion for repayment certainty
2. Keep a floating portion for extra repayments and flexibility
3. Stagger fixed terms so not all renew together
4. This blends certainty with the freedom to pay down faster

A Simple Approach

1. 1. Decide how much certainty you need
2. 2. Fix a portion for stable repayments
3. 3. Keep some floating if you plan to overpay or sell
4. 4. Stagger fixed terms so they do not all renew at once
5. 5. Build a buffer for higher rates at refix

The Payment Jump When It Ends

1. During interest-only, you pay only interest, a lower amount
2. When it ends, you must repay the whole balance over the time left
3. A shorter remaining term means higher principal and interest payments
4. Plan for this jump before the period ends

A Simple Approach

1. 1. Be clear why you are using interest-only
2. 2. Remember the balance does not reduce
3. 3. Work out the payment jump when it ends, and plan for it
4. 4. Do not rely solely on the property rising in value
5. 5. For a home, aim to move to principal and interest

Pre-Approval Is Conditional

1. You apply and provide income, deposit, and debt details
2. The lender gives a conditional pre-approval up to an amount
3. You find a property within that budget
4. The lender assesses that specific property
5. Final approval is confirmed before you are unconditionally committed

&#9888;&#65039; The Rollover Trap

1. Your fixed term reaches its end date
2. If you do nothing, the loan rolls to the floating rate
3. The floating rate is usually higher, lifting your payments
4. Choosing a new fixed rate in time avoids this cost

The Cost Adds Up Fast

1. You borrow a small amount to cover a gap
2. Establishment and other fees are added straight away
3. Interest accrues quickly, often daily, at a high rate
4. If you cannot repay on time, more fees and interest pile on
5. The amount owed can quickly exceed what you first borrowed

If Things Go Wrong

1. Raise the problem with the lender directly first
2. If unresolved, go to their free dispute resolution scheme
3. The scheme considers the complaint independently and at no cost
4. Remedies may follow if the lender acted irresponsibly