Structuring Your Home Loan
Fixed? Floating? How much? How long? These are tricky questions! Read on to help work this out.
Fixed Loans
Floating Loans
Can't decide? Fix and float!
Still can't decide? Get some help!
Fixed Home Loans
New Zealanders are big fixers! That is, 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 stay this same for this period of time.
Fixed loans give people the reassurance and security of an unchanging loan repayment that are easily budgeted for over a fixed period of time. The down side is that you may find yourself paying a premium for this security if interest rates drop significantly. There is usually little flexibility with regard to increasing and decreasing repayments.
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
Also called variable loans, these loans have an interest rate that changes over time, usually 2 to 3% above the Official Cash Rate (OCR). You are required to pay at least the interest on the loan 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 you circumstances have changed and the risk is no longer acceptable - you can fix.
Can't decide? Fix and float!
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 National Bank 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 you 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?
