TMG The Helpful Mortgage Guide

Helpful Mortgage Guide

Whether you’re structuring your mortgage for the first time, or your mortgage is up for review it pays to sit down and consider your options.

This guide has been written by The Team at The Mortgage Girls to help give you some ideas and tips from our personal knowledge and experiences.

Section 1.

Helpful Notes

& Things To Think About…

…when determining your lending structure.

1. Questions to ask yourself?

What are your goals?
Do you have flexibility in your budget?
What are your plans for the next five years?
What’s more important for your repayments – stability or flexibility?
Are you expecting any life events/changes to your future budget? Will you need wiggle room to reduce your repayments in the future?

The following thoughts may help you with the above questions:

2. Want to pay more off your mortgage?

It can be handy to have a portion of your lending on a floating or variable interest rate in order to have the option of increasing your repayments or making a lump sum without penalty.

Apart from collecting a windfall, there really is no magic formula to paying your mortgage faster other than simply increasing your repayments where possible. Do you have wiggle room in your budget to increase your payments?

Rounding your loan payments up to the closest $5 or $10 will help decrease the amount of interest you will pay on the entirety of the loan by a lot more than you would think.

3. Looking for stability in your budget?

Having some longer-term fixed options gives you stability for the future so you know what your payments will be. You can lock in an interest rate for up to 5 years!

Having your loan split into a few loans with different interest rates, terms, and types decreases the risk. If rates were to rise, you would only be affected by a portion when that one loan comes up for review.

4. Wanting to increase equity in your home?

You could look at increasing your repayments or making lump sums to reduce your lending.

Alternatively, upkeep, maintenance, and renovations could help your home to be valued more.

Section 2.

Understanding The Different Options Available For Your Mortgage.

There are five Mortgage options that we use in New Zealand;

1. Principal and Interest (also known as table loan) – most common

2. Interest Only

3. Revolving Credit Facility (reducing/permanent)

4. Off Set

5. Straight-Line – less common

Principal and Interest

(Also known as a P&I or Table Loan)

A principal and interest loan is set for a certain period of time (often 30 years or less) with a repayment schedule—weekly, fortnightly, or monthly—designed to ensure all principal and interest on the mortgage is paid off by the end of the term.

Reasons why a principal and interest loan may work for you

You can make regular repayments.
Your balance reduces as your term decreases.
Your loan is paid off at the end of the term (unlike interest-only loans).
Your repayments can be set with a fixed interest rate or left on a floating interest rate (more about interest rates can be found in the next section).

Potential disadvantages of a principal and interest loan

Takes a while before you see the principal reduce, especially in the early years.
Paying principal and interest could mean higher regular repayments.

Interest Only

An interest-only loan is set so you only make interest payments. The payments are calculated on the principal amount of lending.

For example: If you borrowed $400,000, this becomes the principal. If the chosen interest rate was 3% p.a., your repayments would be $12,000 p.a., which would be $1,020 per month (based on a 31-day month).

Reasons why an interest-only loan may work for you

Interest-only repayments are often much lower than those of a principal and interest loan. This can be helpful during times when you need to reduce expenses for life events such as maternity leave with a newborn baby or saving for a wedding.
Interest-only loans could also work for landlords when their investment property is untenanted for a while due to repairs and/or maintenance.
You can have an interest-only loan on either a fixed or floating interest rate. (Read further down to understand fixed/floating interest rates.)

Potential disadvantages of an interest-only loan

It is not guaranteed that the bank will approve an interest-only loan. They will need to understand your circumstances and strategy, including the expected timeframe to return the lending back to principal and interest repayments.
Over the interest-only period, you would have only paid interest unless you made lump sum payments during that time.
Interest-only loans are often accepted for a maximum period of five years or even less, after which they are expected to transition to principal and interest repayments.

Credit

A revolving credit is like a giant overdraft. You are able to withdrawal funds at any time, for any purpose, up to the available limit, at the same time you can deposit funds to reduce the balance owing.

The main goal to get to $0.00. Once repaid you could use the available balance and make a lump sum repayment to your table loan and start the process again of paying the debt down to $0.00.

There are two types of revolving credit facilities:

Reducing
Non-reducing

Reducing

With a reducing revolving credit, your limit decreases over the period of the loan.

For example: If you had a $20,000 revolving credit facility on a 30-year term, the limit would reduce by approximately $55 each month.

(Calculation: $20,000 ÷ 30 years ÷ 12 months)

Non-reducing

With a non-reducing revolving credit, your limit remains in place permanently and does not decrease.

Reasons why a revolving credit facility could work for you:

Interest is calculated daily and charged monthly, so if you deposit your salary or large lump sums, you will have reduced interest costs on those days.
You can set limits as low as $10,000.
You can deposit your savings into the account to offset your interest.
You can redraw up to the available limit anytime.
Helpful to have funds set aside for times when you do not require them straight away.
Construction: Handy to have while building to ensure you only pay interest during the build.
Good as a temporary measure for items such as renovations—once completed, you could re-fix the lending.
Great for high-income and/or commission earners, as while your income sits in the account, it reduces your interest cost.

Potential disadvantages of a revolving credit facility:

Seeing a negative balance can be demotivating.
They often have a monthly fee.
They can be confusing to understand, and statements may not be very clear to read.
They require good money management skills and discipline.
It can be challenging not to max out your limit.
Sometimes lump sums are required to reduce the limit.
You will not reduce the balance if you only make the minimum repayments.
If your limit is maxed out, you need to remember to make deposits to cover the interest cost.
If you do not reduce the amount you owe or pay more than the interest on a non-reducing revolving credit facility your lending will not reduce.

On a final note about revolving credit facilities:

The Mortgage Girls often say there are two types of people—one that should and one that shouldn’t have a revolving credit. You really want to be good with money. If you spend everything you earn, a revolving credit facility could be tricky to manage. However, if you can stick to a budget, it could be highly beneficial in helping you save on interest.

Offset

An offset mortgage is great way to utilise savings to pay reduced interest on your mortgage.

Reasons Why an Offset Facility Could Work for You

You still make your regular agreed repayments; however, more of your payment will go toward the principal of the loan if you have savings offset. This, in turn, shortens the term of your mortgage.
Multiple accounts can offset your lending (up to 10 at Westpac and 50 at BNZ).
If a family member wants to help you reduce your home loan faster, they can use their personal savings to offset your mortgage. For example, if you have a mortgage of $400,000 and they have savings of $100,000, you would only pay interest on $300,000 of the loan. Their savings remain in their name, though they would not earn any interest.

Potential disadvantages of an off-set mortgage

01. Savings accounts connected to an offset mortgage will not earn any interest

02. The interest rate is slightly higher for an offset mortgage. So, any funds not offset could be subject to a higher interest rate.

03. There could be a monthly fee

04. Repayments stay the same, whether your funds are off set or not

05. Not all banks offer this service

06. Cannot use savings in a Trust or Business as part of the off-set

07. Your need to have savings or additional funds in order to be able to offset

Straight-Line

Straight line is a loan designed for high income/commission paid earners to match their income styles.

How the Straight-Line loan works is it allows you to pay a weekly amount off the principal of the loan and a monthly interest payment, unlike principal and interest where in the first years only a small amount of principal is repaid and a large amount of interest.

Reasons why a straight-line mortgage could work for you

You could reduce the principal of your mortgage faster.
If you earn a high income and regular commissions this option could suit you with regular set repayments and a monthly interest payment.

Positive disadvantages of a straight-line loan

Payments start high.
Having a regular payment alongside a monthly interest payment can take some work to manage.
Generally, works out better to increase your repayments on a principal loan over using a straight-line.

Section 3.

Understanding

The Different Interest Rate Types.

Interest Rates types

• Fixed
• Floating
• Variable
• Offset

Fixed

A fixed interest rate mortgage is where the agreed interest rate is locked for a period of time. This means if market rates go up or down, your interest rate will remain on the agreed rate, with no impact from the market changes.

Fixed interest rates provide certainty of your loan repayments over a period of time. There are options to lock your mortgage in for 6 months up to 5 years.

It is important to note that in order to break a fixed interest rate agreement, you could incur an early repayment fee. This includes any amendments to your lending, for example, restructuring your lending or paying off your lending in full.

When the term is up for your fixed interest rate, you will be subject to the market rates at that point in time. Scroll further down to read more about fixed rate reviews.

Floating

Floating interest rates move up and down according to the market. Floating home loans can be repaid anytime with no penalties or fees *you could be subject to cash back repayments if you pay 100% of your lending.

Floating rates are often higher than the fixed interest rate offerings.

Variable

Variable rates are linked to revolving credit facilities. They move up and down according to the market rate and are not set for a period of time.

Read more about flexible facilities here.

Any interest rate discounts might only be valid for 12 months.

Offset

Offset interest rates often move up and down according to the market rate and are not set for a period of time.

Section 4.

Budgeting.

What will your new budget look like?

Use our calculator through the following link in order to calculate what your repayments would be.

Visit interest.co.nz to see the current interest rates across all major banks in New Zealand.

A few friendly reminders to help when you’re completing your budget:

01. Remember to allow for rates and any new insurances (for example house, contents, mortgage & income protection) in your figures.

02. It may pay to make an allowance for savings towards ongoing upkeep, maintenance and repairs or upgrades.

03. Unexpected and planned life events can have an impact on your budget. It pays to consider future life events, for example; pets, a baby, graduating, a new job, planning a wedding, needing to purchase a new car, medical or vet bills, wanting to complete maintenance or renovations, or even plan a holiday.

Will you open up a savings account for these events?
Will you need to reduce your repayments in the future in order to help cover you whilst on reduced income? A reminder this may only be possible if you shortened your original term.
Will you have enough equity in order to be able to complete a top-up if required?

Section 5.

Fixed Rate Reviews (FRR’s)

What does a fixed rate review (FRR) mean for me?

Your fixed rate coming up for review indicates your interest rate is about to expire.

It’s likely been a year or two since you set your fixed rates and a lot can happen in this time. You may have had a pay rise, a baby, an inheritance, or maybe you want to look at renovating or purchasing another property.

This is a great time to check in with us to make sure you are on track and to explore other options that may be available to you.

What are my options?

After reassessing your circumstances, The Mortgage Girls can help you with the following:

01. Re-fixing your loan to align with future goals.

02. Re-fixing your loan based on the market – spreading your risk.

03. Topping up your loan for many reasons, for example, topping up to accommodate renovations you have planned – potentially creating more equity in your home.

04. Slightly increasing your payments to pay off your mortgage faster with the potential to save you thousands of dollars in interest.

05. Making a lump sum payment, avoiding any early repayment costs.

06. Restructuring to allow for future lump sum payments.

07. Changing the payment frequency to align with your income.

What should I Consider?

01. It is important to think into the future and what your goals are, whilst remaining realistic about the present. Perhaps you could afford an extra $20 a week on your payments, this can make a huge difference in the long run, saving you money and getting you mortgage-free sooner.

02. Perhaps you are expecting a bonus from work, so you might consider leaving a portion of your loan on floating to avoid early repayment costs.

03. Alternatively, you may be thinking about purchasing an investment property in the next 5 years, then we need to structure your loan and repayments to ensure you have enough equity in that time.

How The Mortgage Girls can help?

Meet with one of The Mortgage Girls to discuss the options, we will do all the hard work for you like negotiating interest rates and refinancing if required.

Give us a FREE non-obligation call on 0800 864 864 or email [email protected]

Important information about The Mortgage Girls and how our business works.

Please head to; themortgagegirls.co.nz/important-information

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Disclaimer: The Mortgage Girls Ltd believes the information in this publication is correct as at May 2024, and it has reasonable grounds for any opinion or recommendation found within this publication on the date of this publication. However, no liability is accepted for any loss or damage incurred by any person as a result of any error in any information, opinion or recommendation in this publication. Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy, sell or retain any investment in or make any deposit with any person. The information contained in this publication is general in nature. It may not be relevant to individual circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. This publication is for the use of persons in New Zealand only. Copyright in this publication is owned by

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