Understanding how mortgages work is one of the most important steps in building your financial future. In this Mortgages 101 guide, we unpack key concepts like deposits, interest, and equity - so you can approach home buying with clarity, not confusion.
What Is a Mortgage and How Do Deposits Work?
Let’s start with the fundamentals. A mortgage is a loan you take out to buy a property, and a deposit is the upfront portion you pay yourself.
There are actually two types of deposit involved:
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Purchase Deposit: Typically 10%, paid when you go unconditional or win an auction. It gives the vendor certainty you’re serious and allows the real estate agent to be paid.
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Balance of Deposit: Paid at settlement. For example, if you’re buying a $1 million home with a 20% deposit, you might pay $100,000 upfront and the remaining $100,000 on settlement day.
A common misconception is that you always need a 20% deposit. In reality, you can buy with as little as 5%, though those loans often have income and price caps. If you’re relying heavily on your KiwiSaver, especially for auctions, you’ll need to factor in the 10–14 day processing time – KiwiSaver isn’t instant cash.
Why Trying to Save a Bigger Deposit Can Backfire
A lot of buyers hold off purchasing, hoping to save a larger deposit and avoid owing the bank more. It sounds logical – but it can be a trap if the market is rising.
Trying to “out-save” a moving market rarely works. If property prices are climbing at 5% a year, and you’re saving slowly, your deposit may end up worth less in relative terms. Even with a smaller deposit today, capital growth and regular repayments could help you reach 20% equity faster than you think.
And right now, there’s no penalty interest for some low-deposit loans – meaning a 5% deposit could actually put you in a stronger financial position than someone with 10%.
Paying Your Mortgage Off Faster
When it comes to mortgage repayments, there are only two ways to pay off your loan faster:
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Increase your repayments
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Reduce your interest costs
Complex strategies using revolving credit or offset accounts sound appealing – but most people find them hard to stick to without ongoing support. The simpler approach? Make higher repayments consistently.
For example, on an $800,000 mortgage:
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Minimum repayments over 30 years = ~$1,000/week = $800k in interest
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Increase to $1,500/week = $350k in interest
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Double repayments = $227k in interest and shave 20 years off your mortgage
Small changes in repayment can lead to massive savings over time.
Understanding Revolving Credit, Offsets, and Loan Types
Revolving credit works like a big overdraft attached to your mortgage. It’s flexible and great for lump sum income, but risky if you’re not disciplined. Around 50% of homebuyers use it, though fewer should.
Offset accounts are similar but spread across separate accounts. Good for couples, business owners, or when family wants to contribute without giving up control.
Floating rates give you flexibility to repay at any time but come with higher interest. Fixed rates lock in a lower interest rate for certainty, though you usually can’t make large extra payments.
What Is Equity - and How Do You Use It?
Equity is the difference between your property’s value and your mortgage. But what matters more is usable equity – the amount you can actually borrow against.
Using equity isn’t like withdrawing your own money. You’re still borrowing from the bank, and you’ll need to reapply for that lending like any new loan.
Principal & Interest vs. Interest-Only
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Principal & Interest: Each payment chips away at the loan. Early payments are mostly interest; later ones are mostly principal.
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Interest-Only: You only pay interest, so your loan balance stays the same. Useful for investment properties, but risky if left too long.
For many mortgage products (revolving credit, offset, interest-only), you’ll need at least 20% equity in the property.
Key Takeaways
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You don’t always need a 20% deposit – 5% options are available with conditions.
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KiwiSaver funds aren’t instant – factor in processing delays.
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Out-saving a rising market is hard – timing matters.
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Extra repayments can cut years off your mortgage and save hundreds of thousands.
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Revolving credit and offset facilities offer flexibility, but only suit disciplined users.
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Usable equity is not “your money” – it’s still a loan.
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You need at least 20% equity to access many flexible mortgage features.
Next steps:
Whether you’re buying your first home or restructuring your lending, Lighthouse Mortgages can help – get in touch with our mortgage advisers today.
If you’d like to learn more, check out these other episodes below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
