Monthly Archives: May 2022

How do interest only mortgages work? Learn more here!

Interest only mortgages, often referred to as IO or principle relief, can work for you in certain circumstances, but you need sound financial reasons. In this blog, we look at how IO mortgages work. We also look at what you need to know, if you’re considering this option.

What is an interest only mortgage?

With a ‘standard’ mortgage, your regular payments pay the interest owed for the period. You also pay a small portion of the original mortgage amount (also called the ‘principle’). This means the mortgage amount reduces over time. The interest is charged as a percentage of the amount owed; so the interest payments reduce also.

With an IO mortgage, you pay only the interest portion. You’re basically paying for the cost of having a mortgage, not reducing your debt. Rates for interest only mortgages are the same as for standard mortgages.

How do they work?

The mortgage criteria differ from lender to lender. If you’re looking at getting an IO mortgage, go through a mortgage broker. You’d do this, to save yourself a lot of time and frustration in trying to work out which lender can give you what you need.

Generally speaking, you need to have an LVR under 80%. Usually banks will allow this against a owner-occupied property for a maximum of two years. For an investment property, this would normally be for a maximum of 5 years.

They will also calculate affordability over a shorter timeframe. Let’s say repayments were being calculated for affordability, if paying it off over 30 years. If a client wants a 2 year principle relief mortgage, the bank will then calculate affordability over 28 years. The payments will then be higher and therefore the client’s income will need to accommodate that.

Do Second Tier / Non Bank Lenders offer interest only mortgages?

Second tier lenders sometimes accommodate this structure, but only on mortgages up to 90% LVR. They’re also more flexible on the period limit and how affordability is determined. When a bank can’t accommodate a client a second tier lender can be a good solution.

Some lenders will allow clients to have revolving or offset accounts with an interest only mortgage. This means the client will be able to have money in an account that “pays down” the principle, but that money can be withdrawn if needed. This is a great way to reduce payments in the short term.

Platinum Mortgages has a mortgage calculator that can be used as an interest only calculator. Have a play with this tool; looking at interest only versus principle and interest will help you understand the cost of going interest only for a period.


Is this structure a good idea?

As a general rule it’s best to pay off as much principle as you can, as quickly as you can. This approach will save you a lot in interest costs over the life of your mortgage.

Having said that, there are instances where it may make sense to get an interest only mortgage for a period. A common reason is a homeowner wants to put the money towards renovating their property for the first couple of years, thereby increasing the value of their asset and improving their quality of living. Lenders are obligated to lend responsibly so will want to understand the reasons for going interest only.

This strucuture falls into the ‘special circumstances’ category of mortgages, which is very much our wheelhouse. If you are looking for an interest only mortgage, or indeed any sort of mortgage, reach out, we can help.

 


 

Mortgage Application Rejected , Home Loan Denied, Declined Home Mortgage

How soon can you re-apply after your mortgage application was declined?

We hear the phrase “My mortgage application was declined” on almost a daily basis. With the current tight lending rules, having a mortgage application declined by the bank is an all too common occurrence. It can be very discouraging, but don’t lose hope; there are usually options available to overcome your home loan obstacles.

It is not over if your mortgage application was declined

It’s usual for a bank to require a 3-6 month stand down after they decline an application, after which you can reapply. They’ll inform you of the actual period as part of the application process. But (more importantly) there is nothing to stop you applying straight away with another lender. The key thing is to understand why you were declined by your initial chosen lender. You can then take any action needed to rectify the issues.

Form showing mortgage declined

The importance of using a mortgage broker

We realise that a mortgage broking company saying you need a mortgage broker is hardly impartial advice. But our reasoning is compelling. Your mortgage broker will be able to look at your situation and walk you through why you were declined previously. They’ll then be able to advise you on what needs to be done to be successful in getting a home loan. They’ll look across all lenders, and with their industry knowledge of what the current acceptance criteria is from lender to lender, they’ll know where you are likely to be approved. This is huge, as lending criteria is individual to each lender and it changes all the time.

Understand why your mortgage application was declined

The majority of applications get declined due to one or more of the following reasons:

  • Not enough deposit
  • Not enough income
  • A bad credit score

Once you understand why you were declined, you can discuss with your mortgage broker whether a different bank may accept your application. The banks each use different formulas when assessing whether a mortgage meets their “affordability” threshold. An application could be rejected for not enough income at one bank but accepted at another. Banks sometimes offer mortgages at under 20% deposit, your mortgage broker will know if this is an option currently available and whether you would meet the criteria.

If none are likely to, that leads us to…

Banks aren’t the only option when looking for a mortgage

The stringent lending rules among the banks can mean that an applicant who is perfectly capable of servicing a mortgage still gets declined by the banks. This is where a non-bank lender/second tier lender can be a good option. They accept many applications that the banks decline. The flipside is they charge higher interest rates, but many people find it a worthwhile compromise to get on the property ladder.

If you do go with a second tier lender, make sure to make a financial plan to get yourself in a position to move to a bank within a couple of years to avoid paying higher interest long term.

Non-bank lenders are often a good fit if:

  • You’re newly self-employed. Usually the banks don’t approve lending to someone who has been self-employed for less than two years.
  • Your income doesn’t meet the banks’ standards (but is still high enough to service a mortgage without hardship).
  • You don’t quite have enough deposit for the banks.
  • You’ve been recently discharged from bankruptcy.
  • You have a low credit score.
Mortgage denied

What to do if you don’t currently meet the lending criteria or your home loan is declined

Next steps if you don’t have enough income

Reducing any debt is often the best place to start increasing your income. The banks minus any loan repayments when calculating your mortgage, and they assume the repayments will continue indefinitely. So if you’ve got any loans close to being paid off it could be worth doing so sooner rather than later. Of course, this could eat into your deposit so it’s a balancing act.

The banks also assume any credit cards or overdrafts will be maxed out. Therefore they calculate your income on the basis you will be making the maximum payments each month. They don’t take into account whether or not you pay your credit card off each month. Reduce your credit limits where possible, or better yet, cancel your credit cards and overdrafts.

Beyond reducing debt, increasing income can be tricky. Kiwi’s aren’t great at asking for a raise but if you can find the courage then it could be the difference between getting your own home or not. Look for opportunities for career progression within your job or even a job change if it will provide more opportunity and salary. We know these are not easy changes to make! If you do decide to go for it, make a plan and break it down into steps. Focusing on one step at a time will make the big moves feel much more manageable.

Next steps if you don’t have enough deposit

If you don’t have enough deposit, make sure you’ve looked into using your KiwiSaver and whether you qualify for the First Home Loan or First Home Grant. If it’s a matter of saving more, then make a budget and put savings aside regularly. An automatic transfer of your budgeted savings to a separate account each pay day can really help you stay on track.

Next steps if you have a bad credit report 

As advised previously, second tier lenders are often a viable option for those with bad credit scores. Don’t assume you don’t have borrowing options without first speaking to a broker.

If you have a bad credit score, make sure you check the details are correct. It can be a challenge to get them rectified, but is worth pursuing it if it changes your score from bad to good.

If your report is correct then it becomes a matter of improving your credit score. This means reducing credit limits, paying bills on time and paying off hire purchases! You could even consider completing a debt consolidation to reduce the overall interest rates being paid.

Ultimately, the steps you need to take and the options available to you when applying for a mortgage are very much dependant on your specific circumstances. So we hope we’ve convinced you that a mortgage broker is advisable whenever you are looking for a mortgage, but especially so if you’ve been going it alone and have had a mortgage application declined.

Platinum Mortgages specialises in mortgage solutions for those who can’t get straight forward approval from a bank. Reach out for a no-obligation chat about your circumstances and whether we can help.