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🏠 Understanding Home Loan Repayments

A home loan (or mortgage) is borrowed money used to purchase property. You repay this loan over time through regular payments that include both principal (the amount borrowed) and interest (the cost of borrowing).

Key Point: Your monthly mortgage payment is typically your largest expense. Understanding how it's calculated and what affects it is crucial for making informed property buying decisions and managing your finances effectively over 20-30 years.

The Home Loan Repayment Formula

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

Simple Example

Loan amount: $500,000
Interest rate: 6% per year (0.5% per month)
Loan term: 30 years (360 months)
M = $500,000 × [0.005(1.005)^360] / [(1.005)^360 - 1]
M = $500,000 × 0.005996
M = $2,998 per month

Over 30 Years:

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

Shocking reality: You pay more in interest ($579k) than the original loan amount ($500k)! This shows why interest rates and loan terms matter enormously.

Components of Your Mortgage Payment

Component What It Is Note
Principal Amount that reduces loan balance Increases over time
Interest Cost of borrowing money Decreases over time
Rates (optional) Council rates Some include in payment
Insurance (optional) Home and contents insurance Often paid separately

How Payments Change Over Time (Amortization)

Example: $500k loan at 6% for 30 years ($2,998/month)

Payment # Principal Interest Balance
1 (Month 1) $498 $2,500 $499,502
60 (Year 5) $639 $2,359 $467,759
180 (Year 15) $1,058 $1,940 $387,204
300 (Year 25) $1,801 $1,197 $237,882
360 (Final) $2,983 $15 $0
💡 Early Payments Are Mostly Interest

In the first payment, only $498 goes toward principal while $2,500 goes to interest. By the final payment, nearly all $2,998 is principal. This is why paying extra early in the loan saves so much money!

Key Factors Affecting Your Repayment

1. Loan Amount (Principal)

More borrowed = higher payments. Simple and direct relationship.

2. Interest Rate

Small rate changes have huge impacts over 30 years.

Rate Monthly Payment Total Interest Paid
5% $2,684 $466,240
6% $2,998 $579,280
7% $3,327 $697,720
8% $3,669 $820,840

Just 1% difference (5% vs 6%) means paying $113,040 more in interest!

3. Loan Term

Longer term = lower monthly payment but much higher total interest.

Term Monthly Payment Total Interest
15 years $4,219 $259,420
20 years $3,582 $359,680
25 years $3,221 $466,300
30 years $2,998 $579,280
Trade-off: 15 years vs 30 years saves $319,860 in interest but requires $1,221/month more. Choose based on your cash flow and total cost priorities.

4. Deposit Size

Larger deposit = smaller loan = lower payments and less interest.

House Price Deposit Loan Monthly (6%, 30yr)
$600,000 $60,000 (10%) $540,000 $3,238
$600,000 $120,000 (20%) $480,000 $2,878
$600,000 $180,000 (30%) $420,000 $2,518

20% deposit vs 10% deposit saves $360/month and $129,600 in interest over 30 years!

⚠️ LVR Requirements in NZ

Banks typically require:
- 20% deposit minimum for most buyers
- 10% deposit possible for first home buyers (limited availability)
- Higher deposit (30-40%) for investors
Lower deposits mean higher interest rates and LMI (Lender's Mortgage Insurance) costs.

Fixed vs Floating Interest Rates

Fixed Rate:

  • Interest rate locked for 6 months to 5 years
  • Predictable payments
  • Protected from rate increases
  • Can't benefit if rates drop
  • Break fees if you pay off early

Floating Rate:

  • Rate changes with market (OCR decisions)
  • Payments can increase or decrease
  • Usually higher than fixed rates currently
  • No break fees, more flexibility
  • Can make extra payments anytime

Common Strategy:

Split your loan: 70% fixed (stability) + 30% floating (flexibility for extra payments).

🔢 Calculating and Comparing Repayments

Step-by-Step Calculation Example

Scenario: First Home Buyer in Auckland

Purchase Details:

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

Monthly Payment Calculation:

P = $600,000
r = 6.5% / 12 = 0.5417% = 0.005417
n = 30 × 12 = 360 months
M = $600,000 × [0.005417(1.005417)^360] / [(1.005417)^360 - 1]
M = $3,792 per month

Total Cost Over 30 Years:

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

Comparing Loan Term Options

Same loan: $600,000 at 6.5%

Term Monthly Payment Total Paid Total Interest Interest Saved vs 30yr
15 years $5,225 $940,500 $340,500 $424,620
20 years $4,476 $1,074,240 $474,240 $290,880
25 years $4,056 $1,216,800 $616,800 $148,320
30 years $3,792 $1,365,120 $765,120 -
15 vs 30 Years: Paying $1,433 more per month saves $424,620 in interest and you own your home in half the time. But can you afford the higher payment?

Impact of Interest Rate Changes

$500,000 loan for 30 years at different rates:

Rate Monthly Difference vs 6% Annual Difference
5.0% $2,684 -$314/month -$3,768/year
5.5% $2,839 -$159/month -$1,908/year
6.0% $2,998 baseline baseline
6.5% $3,160 +$162/month +$1,944/year
7.0% $3,327 +$329/month +$3,948/year
7.5% $3,496 +$498/month +$5,976/year

A 1.5% rate rise (6% to 7.5%) costs an extra $498/month or $5,976/year. This is why fixed rates provide security.

The Power of Extra Payments

Base scenario: $500k at 6% for 30 years = $2,998/month

Option 1: Pay Extra $200/Month

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

Option 2: Pay Extra $500/Month

New monthly payment: $3,498
Loan paid off in: 19 years 8 months
Total interest paid: $321,642
Interest saved: $257,638
Time saved: 10 years 4 months
💡 Extra Payments Are Powerful

Just $200/month extra saves $119k and 5 years. $500/month saves $258k and 10 years! Every extra dollar goes straight to principal, not interest. This is why paying extra early matters so much.

Weekly vs Fortnightly vs Monthly Payments

Same loan: $500k at 6% for 30 years

Frequency Payment Amount Annual Total Years to Payoff Interest Saved
Monthly $2,998 $35,976 30 years $0 (baseline)
Fortnightly $1,499 (half monthly) $38,974 25.5 years $61,234
Weekly $749.50 (quarter monthly) $38,974 25.5 years $61,234
Why It Works: Paying half monthly every fortnight = 26 payments/year = 13 monthly payments instead of 12. That extra payment goes to principal, saving years and thousands in interest.

Affordability Guidelines

The 30% Rule:

Your mortgage payment should not exceed 30% of gross household income.

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

Bank Serviceability Test:

Banks test affordability at higher rates (typically current rate + 2.5-3%). They want to ensure you can still afford payments if rates rise.

Current rate: 6%
Test rate: 8.5-9%
Your income must service the loan at the test rate
⚠️ Don't Borrow Maximum

Just because a bank approves $600k doesn't mean you should borrow that much. Leave buffer for:
- Rate increases
- Unexpected expenses
- Life changes (kids, job loss)
- Opportunity to save and invest
Aim for 25% of income, not 30%.

🌍 Real-World Home Loan Scenarios

1
First Home Buyers in Wellington

Meet Sarah and Tom, both 28, buying their first home

Their Financial Situation:

Combined income: $130,000/year
KiwiSaver combined: $80,000
Additional savings: $40,000
Total deposit available: $120,000

House They Want:

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

Monthly Costs:

Expense Amount
Mortgage payment $3,421
Rates $280
Insurance $120
Maintenance (budget) $200
Total housing cost $4,021

Affordability Check:

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

Their Decision:

They realized 37% was too tight. Options considered:

  • Option A: Delay purchase 6 months, save another $30,000 deposit (reduces loan to $500k, payment to $3,227)
  • Option B: Buy at $600,000 instead ($480k loan, $3,098/month = 28.6%)
  • Option C: Buy the $650k house but plan for Sarah's upcoming $15k raise (reduces to 33%)

They chose Option B: smaller house now, upgrade later with more equity.

2
Refinancing to Save Money

Mike's situation: 5 years into a 30-year mortgage

Original Loan (5 years ago):

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

After 5 Years of Payments:

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

Refinancing Opportunity:

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

Option 1: Keep 25-Year Term

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

Option 2: Keep Same $2,797 Payment

Loan paid off in: 20.3 years (not 25)
Time saved: 4.7 years
Interest saved: $78,235
Mike's Choice: He kept the higher payment (Option 2), saving nearly $80k in interest and finishing 5 years sooner. The refinancing costs paid for themselves in months.
3
Upgrading Family Home

The Chen family: selling starter home, buying larger property

Current Home:

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

New Home Purchase:

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

Repayment Comparison:

Scenario Payment Note
Old home (was paying) $2,547 7% rate, 23 years left
New home (30-year term) $3,341 6.4% rate
New home (20-year term) $3,908 Same 6.4% rate

Their Strategy:

They chose the 20-year term ($3,908/month) because:

  • Only $1,361 more than they were paying
  • They're now 35-40 years old, want mortgage paid by 60
  • Large deposit (38%) meant loan was manageable
  • Saves $124,728 in interest vs 30-year term
4
Interest Rate Rise Impact

Lisa's scenario: Fixed rate ending, facing higher rates

Original Loan (2 years ago):

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

Fixed Rate Expiring:

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

New Payment Shock:

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

How She Managed:

  • Cut discretionary spending by $400/month
  • Picked up 5 hours/week overtime ($280/month extra income)
  • Reduced KiwiSaver from 6% to 3% temporarily ($150/month freed up)
  • Total adjustments: $830/month (covered the $722 increase)
⚠️ Rate Rise Reality

Lisa's experience is common. When rates rose in 2022-2024, many NZ homeowners faced 20-40% payment increases when refixing. Always stress-test your budget at rates 2-3% higher than current. If you can't afford that, you're borrowing too much.

🎯 Test Your Knowledge

Complete this 10-question quiz on Home Loan Repayments

1. On a $500,000 loan at 6% for 30 years, approximately how much total interest will you pay?
$300,000
$579,000
$750,000
$1,000,000
2. In the early years of a mortgage, most of your payment goes to:
Principal
Interest
Insurance
Equally split between principal and interest
3. What is the recommended maximum percentage of gross income for mortgage payments?
20%
25%
30%
40%
4. Choosing a 15-year term instead of 30-year will:
Lower your monthly payment
Increase monthly payment but save massive interest
Keep payments the same
Double your total interest paid
5. What is the typical minimum deposit required for most NZ home buyers?
5%
10%
20%
30%
6. Paying fortnightly (half your monthly payment every 2 weeks) instead of monthly:
Makes no difference
Saves years and thousands in interest
Doubles your payments
Only helps if you have a variable rate
7. A 1% increase in interest rate (from 6% to 7%) on a $500k loan will increase your payment by approximately:
$50/month
$150/month
$330/month
$500/month
8. What is the main advantage of a fixed-rate mortgage?
Lower interest rate
No fees ever
Predictable payments, protected from rate rises
You can make unlimited extra payments
9. Paying an extra $200/month on a $500k, 30-year loan at 6% will save approximately:
$20,000 in interest
$60,000 in interest
$119,000 in interest
$200,000 in interest
10. When banks test your loan affordability, they typically use:
The current interest rate
Current rate plus 2.5-3% (stress test)
The lowest rate available
Whatever rate you want

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