Climbing property values and competition between buyers has made the task of securing the keys to a new home particularly tricky of late.
Of course when prices rise, new mortgage amounts usually track in the same direction. In this kind of market, home buyers can find themselves focusing on simply securing the lending they need, rather than spending some time thinking about how to best structure their mortgage for their short and long term needs.
On the surface, mortgages look pretty cut-and-dry, but if you take a closer look, there are a variety of options designed to suit different needs. Want to pay it off as fast as possible? Want the comfort of fixed repayments for a period of time? Is this property your first step in building an investment portfolio…etc?
Before you sign on the dotted line and breathe a sigh of relief that the house hunt is over, consider the different ways you could structure your mortgage. Here’s a brief outline of the primary options to get the conversation started.
Fixed rate home loans
A fixed rate home loan has an unchanging interest rate for a set period of time. Usually you fix your home loan because you expect interest rates to increase so you want to lock in the lower rate, or because your income is fixed and you don’t want to risk your repayments changing within a period of time.
You can choose which time period to fix your home loan rate; commonly fixed terms range between 1-5 years. Depending on the economic cycle, fixed rates can be higher or lower than the current floating rates.
Fixed rate home loans allow you to plan your repayments across the fixed period, but they also limit the amount you can repay. Most home loans will allow you to repay around 5% more than the agreed amount over a 12-month period, but it’s specific to the provider. Make sure you know what you can and can’t do, and any related fees that may apply to additional repayments on fixed rate home loans.
Floating rate home loans
Floating rate home loans fluctuate along with the Official Cash Rate (OCR) set by the Reserve Bank of New Zealand (RBNZ). If the Reserve Bank drops their rates, home loan interest rates may drop. Conversely, if the RBNZ increases rates, home loan interest rates may increase. As your interest rate changes so does your repayment level – so you benefit when it goes down and you face an increase when it rises.
Floating rate home loans allow you to pay back your loan as quickly as you like, and allow you to either increase your regular repayments or make lump sum payments as funds become available. These loans also often offer an added benefit that they can support a revolving credit facility and/or you can use your savings to off-set your interest.
Revolving credit allows you to take money out of your home loan as well as put it in. Thais means if you decide after a period of time that you would like to renovate your house, you can access the funds you need from your home loan.
You can also choose to credit your salary into this kind of home loan and benefit from reduced interest rates until you withdraw it again to deal with regular bills and payments. This is often a smart way to borrow because by depositing all of your income into the account, you can minimize your monthly interest charges. This kind of home loan requires a fair bit of discipline and good timing, but managed well it can be a great tool in reducing mortgage debt faster.
The important thing to remember is that your mortgage should be tailored to your individual needs and circumstances.
Depending on what you want to achieve, you could consider a combination of different options – part on fixed and part on floating; different amounts on different fixed terms.
That’s where Vaughan can assist in getting the right structure in place for you and what you’d like to achieve.
Get in touch with Vaughan and our the Broderick Consulting Team today to learn more about your options; book a first mortgage meeting here.
Please note: The content of this article applies in a rising competitive market.
A Disclosure Statement is available free and upon request.
Published on Thursday, March 2nd, 2017, under Latest News