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Fixed? Floating? Reducing? What are my options?


03 March, 2000

Fixed? Floating? Reducing? What are my mortgage options?

Mortgage interest rates are going up, and they show no sign of stopping, in line with recent statements by the Reserve Bank, economists and major lending institutions. As a home owner, this is a harsh reality after the historically low mortgage interest rates on offer during 1999.

According to the Real Estate Institute of New Zealand, in the present environment it’s a wise move for all home owners to take a good, long look at their mortgage arrangements, to ensure that they have the best deal possible.

The National President of the Institute, Mr Max Oliver said, “Many first home buyers took advantage of the low interest rates to enter the property market and leave flatting behind them. Now that we are in a higher interest rate environment, these same people have to plan their finances carefully so as not to get into budgeting difficulties.”

“Broadly speaking there is little difference between the rates offered by individual lending institutions and often there are extra fees payable if you transfer your mortgage, making ‘bank hopping’ a marginal exercise at best. There are however seven different mortgage options, which gives more control over your level of financial exposure but makes choosing a solution to your own interest rate risk slightly difficult.”

Mr Oliver recommends that home owners realistically assess their personal saving style when deciding the mortgage option best suited to them.

“Mortgage reduction agencies and mortgage brokers are now offering very attractive packages that combine a revolving credit facility with a traditional mortgage, often called a credit line mortgage. While these systems can be extremely effective, there are pitfalls.

“Unless you're very good at budgeting and very disciplined at sticking to it and paying your bills on time, you won't save anything at all. The system will end up costing you money. On the other hand, those with greater self-control can reduce their mortgage in a much more timely manner than traditional mortgages.

“In short, those who tend towards ‘budget blowouts’ should avoid the temptation of being involved in a mortgage system that they can’t handle, while for people who have tight control of their finances, these newer systems offer real value. Accepting which of these two extremes you are, allows you to make a realistic, viable mortgage decision.”

Mr Oliver added that these products are also on offer from banks and, while cheaper, do not offer the budget advice that mortgage-reduction agencies do. Again, this is a choice that will depend on your personal financial style and needs.

“The mortgages available from banks and lending institutions are increasingly varied and even tailored towards the individual’s needs. Home owners who have not investigated their options recently should reinvestigate what their bank or broker has on offer.”

“The New Zealand culture has a tradition of home ownership, and increasingly home owners are becoming better informed, educating themselves about the property market, the many options available and the opportunities offered by it. The Institute believes that a large part of it’s public role is to communicate as much information to New Zealanders as possible, so they may make the most educated decisions possible.”


The Mortgage Options

Table The most common style of mortgage. Repayments remain the same throughout the term, subject to interest rates changing. In the beginning repayments are mostly interest, towards the end, they are mostly principal

Reducing An equal amount of principal is paid each time, in addition to the interest on what is still owed. As the principal reduces, so do the interest payments. Thus, less is paid each time.

Flat or Interest Only Payments are interest only, with the principal paid in full at the end of the term. Often only available as bridging finance

Floating Rate A floating interest rate can move up or down at any time. Generally lower interest rate than fixed rate, but not guaranteed or consistent.

Fixed Rate Interest rate is fixed for a specified period of time.

Capped Rate Interest rate will not exceed an agreed level, but will go down if floating rates drop below the capped rate. The capped rate will usually be higher than the floating rate.

Credit Line Mortgage or
Revolving Credit facility Traditional mortgage with a revolving-credit facility. Each month, all income goes into it. Interest is calculated daily but charged monthly, meaning for a large part of the month, therefore, the outstanding balance on your loan will be less than on a standard mortgage. This is because the principal has been reduced by your pay being credited against the loan.

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