Structuring Your Home Loan
When finalising the details of your home loan the Fix or Float question can be a real stumbling block? How much? How long? These are tricky questions! Read on - we have some suggestions that may help you with this decision.
Fixed Home Loans
New Zealanders are big fixers! That is, when it comes to the fix or float question they fix the majority of their loans for periods of 6 months or longer. You can fix for up to 7 years with some banks!
Fixed loans keep the same interest rate for the number of months or years they are fixed for. As a result, the regular mortgage payments for a fixed home loan stay the same for this period of time.
Fixed loans give people the reassurance and security of an unchanging loan repayment that is easily budgeted for. The down side is that you may find yourself paying a premium for this security if interest rates drop significantly. There is also little or no flexibility with regard to increasing and/or decreasing your repayments on a fixed home loan.
If you fix - deciding how long to fix the loan for can be difficult. Most banks will recommend that you fix for no longer than 2 to 3 years as things do change, both with personal circumstances and with interest rate cycles. Fixing for 2 to 3 years at a time will usually mean you average out at a moderate interest rate over the duration of your loan. You can break a fixed loan and repay it early but sometimes this can incur hefty penalty costs and is best avoided.
Floating Home Loans
Floating home loans (also called variable loans), have an interest rate that changes over time. The interest rate of floating or variable loans is usually 2 to 3% above the Official Cash Rate (OCR). You are required to pay at least the interest on the loan monthly but you can vary your payments or make lump sum repayments without being penalised.
With a floating loan, on top of regular repayments, you can pay off more of your mortgage whenever you get the chance, without incurring any penalty - so if you are expecting a big payday or a lump sum of cash that you want to go towards your home loan, this may be a good option. Also, if you want to pay any extra money, even small amounts into your mortgage, this gives you the flexibility - allowing you to pay off your mortgage earlier. If at anytime you feel uncomfortable with a floating loan you can fix it - say interest rates are heading skywards, or your circumstances have changed and the risk is no longer acceptable - you can fix.
If you are really struggling with the fix or float question - you can always float to start with. At any time you can fix (as long as this is within the terms of your home loan agreement) - this may give you the breathing space you need and you can make the decision at a later date. With this approach you may find that fixed term interest rates move in the time it takes you to make the decision.
Can't decide between fix or float? Do both!
A mixture of fixed and floating home loans suits many people, mixing some reliability with some flexibility.
If you cannot decide maybe the option of dividing your home loan into a number of loans and having some of them fixed over a variety of periods with some floating is for you - this spread is a good way to minimise risk.
Still can't decide? Get some help!
The theory around fixing versus floating and when to fix and when to float is a science! And when it comes down to it, nobody really knows what is going to happen in the future with mortgage interest rates. There are a lot of factors involved and the New Zealand and global economy all have an influence.
The best places to go to be assured that you are taking the advice of people who have all the facts at hand, and all the best brains working on these questions, is a bank and sites such as interest.co.nz. Economic reports and commentaries by banks' chief economists are a great source of information and will give you the information you need to be able to make a decision.
While all the major banks publish their own reports, a favourite of ours at Propertytoolbox is the BNZ Weekly Overview. This report comes out weekly and has a section tailored to residential borrowers called 'If I was a borrower what would I do'. The ANZ also has a good report tailored to the property market.
When deciding about structuring your home loan it is always best to gather information from a number of sources - then you can be assured that you are getting the full picture - or as close to it as you can given that nobody can predict the future.
When you have all the facts, here are some questions to ask yourself that may help you to decide:
- Are you likely to have any extra money that can go into your mortgage - a large amount or small amount here and there?
- Are you likely to move house - What are your plans for the next few years? Do you have plans to move on? Might you have to move for your job? Is your family growing? Might you go overseas?
- How do you feel about risk? - Would you rather know exactly what your repayments are going to be or are you happy with some variability.
- Current mortgage interest rates - Are interest rates on their way down or up?
- What are the experts saying?