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Learner’s Guide
FINANCIAL CAPABILITY
Licensed to:
Western Heights High School
2018 - 2a © ATC New Zealand
www.instant.org.nz
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About this
Learner’s Guide
Learning Purpose & Outcomes
In this course you will learn how to choose the best options to finance the purchase of a
property.
Once you complete this course, you will be able to do the following:
• Look at the advantages and disadvantages of different factors and how they can
influence a purchasing decision
• Look at other considerations and understand how they can influence the purchase of a
property
• Analyse finance options and select the best option according to personal financial
circumstance
A glossary containing difficult or technical terms is provided at the end of this guide. These
words are highlighted in the main text.
Additional
Resources
Sorted: Your Independent Money Guide: https://www.sorted.org.nz/
Commission for Financial Capability: http://www.cffc.org.nz/
KiwiSaver: http://www.kiwisaver.govt.nz/
Contents
Glossary 44
LESSON 1:
Learning Objectives
In this lesson, you will learn about the advantages and A space has been left
disadvantages of factors that influence the purchasing of a property. on the right of every
You will learn about the following factors: page for you to make
notes about what
Mortgage types you are learning.
Deposit
Interest rates
Land Information Memorandum (LIM) report
Builder’s report
Insurance.
Mortgage types
Table
Bridging
Reducing
finance
Mortgage
types
Second
Interest only
mortgage
First
Revolving
mortgage
Table
Interest
Principal
Advantages
The advantages of a table mortgage include:
• there are set regular repayments, so a borrower knows how
much the payments will be. This will make it easier for the
borrower to budget
• the mortgage is usually for a set period (eg 20 or 30 years),
so a borrower knows when the loan will be paid off by
• borrowers can choose between a fixed interest rate, a
floating interest rate, or a mix of both fixed and floating.
Disadvantages
The disadvantages of a table mortgage include:
• it may not be suitable for someone whose income varies
• payments cover mostly the interest at the beginning of the
loan. Only a little of the principal is paid off initially.
Reducing
Interest
Principal
Advantages
• The overall amount of interest paid may be less than a table
mortgage. This is because payments are higher at the start
and pay off a higher amount of principal
• Regular payment amounts reduce (depending on
circumstances, this can be an advantage or disadvantage).
Disadvantages
• Regular payment amounts reduce. If a person can afford to
make higher payments for the whole period of the loan (eg a
table mortgage), the overall cost of interest would be lower
than for a reducing mortgage.
Interest Only
Interest
Advantages
• The regular payment amounts are lower as they only cover
interest, not principal
Disadvantages
• The overall amount of interest paid is higher
• Regular payments do not pay any of the loan off. At the end
of the loan period, the borrower must pay the full amount of
the loan back to the lender.
Revolving
Loan limit
Loan balance
Advantages
• If a person is disciplined with their money they are likely to
be able to pay this type of mortgage off quicker
• It can save interest for a borrower, as all their available
money is paying off the loan
• It is suitable for a person whose income varies
Disadvantages
• If a person is not disciplined with their money, it is easy
to keep spending the money available and not reduce the
mortgage. If they do, then this type of loan will take even
longer to pay off.
First mortgage
Most people buying a property just need one mortgage, a first
mortgage. Legal conditions of a first mortgage mean that if the
borrower does meet their obligations, the mortgage provider has the
first rights on the property.
Advantages
Advantages of a first mortgage include:
• lower interest rates (than a second mortgage)
• other advantages will depend on the type of first mortgage
(table, reducing…).
Disadvantages
There is usually a lower limit of how much can be borrowed for a
first mortgage (eg 80% of the property value).
Second mortgage
Sometimes, as well as having a first mortgage, a property owner
may take out a second mortgage.
Advantages
Second mortgages have the advantage of :
• allowing a borrower to borrow money against a property to
make purchases or pay off debt
• having lower interest rates than other types of loans, such as
credit card debt.
Disadvantages
Second mortgages can be quite risky. Risks bring the following
disadvantages:
• second mortgages are riskier for mortgage providers;
therefore, they charge higher interest rates
• a second mortgage payment can be a financial drain
• if a borrower does not meet the obligations of their second
mortgage, they could lose their house.
Bridging finance
Bridging finance is a short-term home loan (2 weeks to 3 years). It
is lent to enable a person to purchase property while they wait to
secure finance to help pay for that property.
Advantages
• enables a purchaser to buy another property before selling
their existing one
• gives flexibility and allows the property owner more time to
sell the original property.
Disadvantages
• the borrower will need to pay mortgages on two properties,
until the original house is sold
• fees and interest rates are more expensive for bridging
finance
• if the borrower is not able to keep up with payments, they
may be forced to sell their original home for a lower price.
2. List one mortgage type that would be suitable for Tyler if his income varied.
3. List three mortgage types that have the disadvantage of higher interest costs.
Deposit
1. How long does a person need to be a member of KiwiSaver before they can
withdraw money to purchase a first home?
2. How does a KiwiSaver member apply to withdraw money to purchase a first home?
Advantages
Advantages include:
• the larger a deposit is, the less a person will need to borrow
• the less a person borrows, the faster they will be able to pay
off a loan.
Disadvantages
Disadvantages include:
• the money used for a deposit cannot then be used for other
things
• if money from KiwiSaver is used for a deposit, then the
person will have less money for retirement.
Interest rates
Fixed interest The interest rate remains the same for a set
rate term (eg 6% per annum for 3 years).
Interest rates are subject to change. This means that floating interest
rates can move up and down depending on what is happening in
the economy.
LIM report
LIM (Land
Information A report from a city council that provides
Memorandum) information on a property
report
Advantages
LIM reports enable a property purchaser to:
• ensure a property has compliance (if it hasn’t it could be
costly to obtain compliance from the council)
• know if there are any potential problems with the land (eg it
could be at risk of flooding)
• know the current cost of rates, so that they can budget for
this expense.
Disadvantages
Disadvantages of a LIM report include:
• property buyers need to wait for a LIM application to be
processed (up to two weeks)
• councils charge a fee for LIM reports.
Builder’s report
Advantages
A builder’s report can help:
• pick up potential problems that a buyer may not be able to
pick up themselves
• identify potential costly repairs before a person commits to
buying the property
• a purchaser to negotiate a lower price if significant problems
are found
• give peace of mind to a purchaser that a property has been
checked, and that they know what they are buying.
Disadvantages
Disadvantages of builder’s report include:
• cost
• they often only involve a visual inspection, and so may miss
some problems that cannot be seen on the surface (eg a
shower leaking at the back wall)
• some building report provider’s may be less in-depth than
others.
Insurance
the insurer’s
the excess
reputation
Disadvantages
2. Tyler obtained quotes for insurance for the house he wanted to purchase. He
received quotes from three different insurance providers. This table shows the
house insurance policy each company offered Tyler.
• List the advantages and disadvantages that each of these house insurance
policies would offer Tyler.
Disadvantages
3. List other insurance types that would be advantageous for Tyler to consider, and
why they would be advantageous.
LESSON 2:
Learning Objectives
In this lesson, you will learn about other considerations for
purchasing a property in terms of their influence on the purchasing
decision. You will learn about the following factors:
mortgage provider fees and incentives
lawyer fees
ability to service the loan
repairs and maintenance
property management fees
body corporate fees.
Lawyer fees
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Lawyer fees
plumbing -
fix toilet
repairs and
maintenance
LESSON 3:
Learning Objectives
In this lesson, you will learn about options for financing and
purchasing a property. You will learn to analyse and select options
that are suitable for a person’s personal financial circumstances. The
options that you will analyse and select include:
different mortgage types, terms, repayment amounts and
frequency, and costs
different deposit amounts, and sources
other purchase costs
Personal
A person’s money situation (their income,
financial
expenses, debts etc)
circumstances
When we analyse the best mortgage type for Talia in relation to her
personal financial circumstances we can see that bridging finance
might be the best option for her.
The reasons for this are this type of loan would allow her to
purchase the second house while she waits for her first house to
sell. She would need to be able to prove that she can afford to pay
off both loans.
The justification for this is as she still owns her first property and
has a mortgage of $300,000 on it. So, she needs a short-term
second loan while she waits for her house to sell. Most other
mortgages (apart from a second mortgage) would not allow her to
do this. The second mortgage, while it offers Talia a chance to win
a holiday, it does not allow her to borrow the amount she needs -
$400,000.
A revolving mortgage would suit Brad better than the other types
of mortgages, as then all his unused money can help pay off
his mortgage and reduce his interest costs. This suits him as a
disciplined person who is keen to pay off his mortgage as fast as
possible. The other mortgages do not offer this flexibility, and some
charge penalties for lump sum payments.
The property Tyler wants to purchase is $260,000. He has $60,000 deposit and
wants to borrow $200, 000. He gets paid $600 after tax each week. He has $350 a
week to spend on mortgage payments. He would like to pay his mortgage off as fast
as he can afford to.
Continued on next page...
3. Justify why this is the best choice for Tyler instead of other options.
2. What money sources do you think Tyler should use for his deposit?
3. Describe the reasons why you decided on this deposit amount and these sources.
4. Justify why you decided on this deposit amount and these sources, rather than
other options.
Scenario – Brad
Brad is organising the purchase of his $400,000
home. He is considering the options he has for the
other purchase costs he needs to pay.
Lawyer fees
Glossary
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