Building a bespoke mortgage – just for you.

3d illustration of small house and dollar sign on scale

High property values and competition between buyers has made the task of securing the keys to a new home particularly tricky.

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 straight-forward – amount, interest rate, term. But if you take a closer look under the hood, there are a variety of options designed to suit different needs. Do you want to pay it off as fast as possible? Are you looking for the comfort of fixed repayments for a period of time? Is this property your first step in building 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. And if you’d like to understand the options in more detail, and how they relate to your needs, get in touch.

Fixed rate home loans
A fixed rate home loan has a fixed (unchanging) interest rate for a set period of time. Usually you fix your home loan either 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 what time period to fix your home loan rate for: common fixed terms range between 1-3 years. Also remember, 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 will drop. Conversely, if the RBNZ increases rates, home loan interest rates will increase. Of course, 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, allowing you to either increase your regular repayments or make lump sum payments as funds become available. Floating rate home 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
Revolving credit allows you to take money out of your home loan as well as put it in. That 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. Of course, 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.

Off-set to reduce interest
Alternatively, you may choose to off-set your interest by setting up a group of accounts that includes your savings and transactional accounts as well as your home loan. The bank will calculate your principal debt by combining the debt in your home loan with the positive cash position in your other accounts, thereby reducing your interest costs. Any money you save in interest allows you to shorten the life of your home loan.

And of course, 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… Taking a good look at the various structures, and what a bespoke mortgage crafted just for you could help you achieve, is certainly worth a bit of investigation.

Please note: The content of this article applies in a rising competitive market.

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