Structure of your home loan

Before you decide on how to structure your home loan, there are a few things you will need to know, like types of loans available and the difference between fixed and floating (also known as variable).
How you structure your home loan will depend on a number of personal factors such as income flow and future plans. Structuring your home loan correctly is very important as it can save you thousands of dollars in interest and cut years off your home loan!  They say it’s not the rate you pay but rather the rate at which you pay off your loan that’s important. While we agree, ideally getting the best rate and paying if off as soon as you can will give you the best result.

Click here to download your Home Loan Structure Checklist

Fixed Interest Rates

You can generally choose to fix the interest rate on your mortgage for periods ranging from 6 months to 5 years at a time. Some banks also offer terms of up to 7 years.

The upside of having a fixed rate is that repayments cannot go up on you during the fixed interest rate period. This option provides you with the peace of mind of knowing what your repayments will be for a given period of time. The downside is that if interest rates go down and you have fixed your rate for a longer period of time you are stuck paying the higher rate. In the event that you wish to cancel the fixed rate contract you may have to pay early termination fees.

A fixed interest rate may suit you if:

•    You prefer the certainty of knowing what your repayments will be for the period
•    You’re unlikely to make large lump sum payments within the fixed rate term
•    You’re unlikely to sell your home during the fixed rate term
•    You’re on a fixed income
•    You understand penalties may apply if you break the fixed rate early

Variable/Floating Rate

This means that your interest rate can go up or down as the economy changes. Variable rates can move either way resulting in increased or decreased interest costs. A benefit of variable rate loans is that you can pay off lump sums without penalty. You can also switch from a variable interest rate to a fixed rate at any time.

Floating Rates may suit you if:

•    You wish to pay off large lump sums
•    You are planning to sell your property or have uncertain future plans

Combos

Depending on your circumstances, you may wish to have a split home loan, with portions on both fixed and floating to provide you with some flexibility.

Types of Mortgages

Table loan
This type of loan is the most popular in New Zealand. How it works -each repayment includes a combination of interest and principal. At first, your repayments will comprise mostly of interest but as the amount you still owe begins to decrease, your regular repayment will include less interest and repay more of the principal (the amount you borrowed). Most of your later mortgage repayments go towards paying back the principal.

Straight Line Loan
This type of loan is seldom used in New Zealand. How it works – the amount of principal you are borrowing is divided into equal repayments over the term of the loan, and then interest is applied to each of these repayments. Each repayment includes the same amount of principal, so as the total principal reduces, so does the interest charged. This way the repayments reduce a little each time.

Interest Only
With interest only loans you are only paying the interest cost but no principal, so the amount that you borrow does not reduce. Interest only loans are usually only available for those who have more than 20% equity in their property and are often limited to a maximum period of 5 years.

Flexible Facility
A flexi facility is like having a large overdraft facility and combines your daily transactions and home loan into one account. This way when your income is paid in, it immediately reduces your home loan balance saving you on interest. Some flexi facilities have reducing limits which help you repay the principal. If you have a non-reducing limit you need to be very disciplined in making principal repayments to the account to reduce the amount of the loan.

Often people with flexi facilities will use their credit card for all their day to day expenses and then pay the full balance owing before due date. This provides some interest free credit and leaves the dollars in your account reducing your interest costs. If you are going to use your credit card in this way – we recommend setting up a direct debit to pay your credit card – that way you’ll never miss the due date and be up for hefty interest rate fees. We also recommend that so long as you always pay your credit card before due date that you look for a card that offer maximum rewards – you may like to save up air points for a mid winter break!

Click here to check out the Canstar report on credit card options and rewards

Offset Loans
Some lenders offer offset loans. Offset loans offset the amount of your loan by the value of funds held by you in other accounts thereby saving you in interest costs. Offset loans are available on floating rates only.

Capped Rate Loans
Capped rate loans are available from some lenders. A capped interest rate on your home loan means you’ll pay less interest if rates fall. However, in the event that rates do go up, your interest rate will never go higher than the capped rate.

Take advantage of our Free Planning Meeting today to get expert advice about the best way to structure your home loan.

How to save on interest costs

• Pay more than the minimum repayments required
  Even if it’s only an extra $20 per week, you may be surprised by the difference it makes to your overall interest costs and term of your loan. For example on a $350,000.00 loan over 30 years based on an interest rate of 6.00% your interest cost over the 30 years will be $226,924.00 but by increasing your weekly repayments by $20 per week you will save over $43,000.00 in interest costs and reduce your loan term to 28 years.
• Reduce the term of your loan
  Reducing the term of your loan is another way to save you literally thousands of dollars on your loan. So instead of opting for a 30-year term check out what the repayments would be if you decreased the term to 25 years or even less – if you can manage the additional repayment cost comfortably then go for it!
• Throw some lump sums at your mortgage
  Get a bonus sometimes? Consider putting some of it on the mortgage. Again you’ll be surprised by the dollars you can save. Jump on our calculator and have a play!
• Interest rate gone down?
  If you are lucky enough to get a lower interest rate than you previously had, keep the repayments the same.
• Got a pay increase?
  Consider increasing your repayments before you get used to having the additional cash.

Things to consider when deciding on your loan structure

•    Can you comfortably afford more than the minimum repayments?
•    Do you receive lump sum payments?
•    Do you receive bonuses?
•    Are you likely to sell your property within the next 5 years?
•    How disciplined are you when it comes to managing your money?
•    How risk adverse are you (ie are you comfortable with a floating rate which can change at any time?)
•    Repayment frequency? Weekly/fortnightly/monthly – (not all banks offer weekly repayment options)

Take advantage of our Free Planning Meeting today to get expert advice about the best way to structure your home loan.

Before you meet with your mortgage advisor it is a good idea to have considered the above questions, as these factors will help in determining the best loan structure for you.

Click here to download your Home Loan Structure Checklist

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