Mortgage structure?

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shreyas

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#112069 25-Nov-2012 12:21

Hi All,

So we finally managed to buy a house in this crazy market recently (and what a mission that was!).

Now comes the enchanting task of figuring out a structure for our mortgage to pay it off as quickly as possible. I have been reading up a lot on the net but I'd like some practical advice from people who've 'been there, done that'.

I am finalising my loan next week (not sure which bank as yet as I'm still negotiating rates) so some advice would be greatly appreciated.

Thanks!

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#722721 25-Nov-2012 21:36

I personally think the fastest way of paying it off is revoving credit.

If you can reliably save, nasically anythng you don't spend is droppng your mortgage and interest bill.

But unlike other mortgates there's no "bill to pay" to it's enirely up to will power and discipline to essentally reverse save.

Splitting it to a partial table loan is also a good method until you get used to having it.

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Niel

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#722740 25-Nov-2012 22:07

Our loan is split up in 6 facilities, just because of top-ups we've done over the years (when the unforeseen happened, not for luxuries). Each has a different fixed term expiry so that they do not change all at the same time, and currently 3 are floating of which one has all the extra cash and another is the daily transaction account. Apart from not paying interest on that part of the mortgage, it is also tax free as the interest saving is not considered taxable income (unlike a "saving" account). We've run our mortgage like that for about 8 years with Sovereign.

If you have a simple mortgage then Kiwi Bank is likely good for you. If like us you have/had a few complications you probably want to go through a mortgage broker (can refer you to a good one in Auckland). We've bought a house with essentially no deposit or credit history 2 years after migrating, went through a few years of my wife (engineer) not working while we had a second property which could not generate any income and could not be sold. For those situations you need someone that can present the info in a way the bank will accept it.

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shreyas

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Master Geek

#722744 25-Nov-2012 22:12

davidcole: I personally think the fastest way of paying it off is revolving credit.

If you can reliably save, basically anything you don't spend is dropping your mortgage and interest bill.

But unlike other mortgages there's no "bill to pay" to it's entirely up to will power and discipline to essentially reverse save.

Splitting it to a partial table loan is also a good method until you get used to having it.

Thanks for the great advice!

Yea I am considering a 70% fixed (2 years) and 30% revolving at this stage. Do you reckon that's a reasonable way to go forward or should there be a floating component too?

davidcole

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#722746 25-Nov-2012 22:19

shreyas:
davidcole: I personally think the fastest way of paying it off is revolving credit.

If you can reliably save, basically anything you don't spend is dropping your mortgage and interest bill.

But unlike other mortgages there's no "bill to pay" to it's entirely up to will power and discipline to essentially reverse save.

Splitting it to a partial table loan is also a good method until you get used to having it.

Thanks for the great advice!

Yea I am considering a 70% fixed (2 years) and 30% revolving at this stage? Do you reckon that's a reasonable way to go forward? Or should there be a floating component too?

Rates are fairly good at the moment so your 70/30 split should be ok. As as far as I know you cant fix a revolving component.

We did a 60 table/40 revolving split then after a couple of years, after figuring our we would comfortable with the revolving system converted it all to revolving,.

Everyone is different though and I can only tell you our experience. The idea of ever dollar not spent was reducing our debt was quite powerful for us, and so we worked hard at "saving" to get to 0.

mattwnz

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#722747 25-Nov-2012 22:20

A good broker should be able to recommend a good structure, and they can get better rates than you can negotiate with the bank too. Hope you didn't pay too much over the RV. The property market is a huge bubble at the moment.

shreyas

80 posts

Master Geek

#722748 25-Nov-2012 22:22

Niel: Our loan is split up in 6 facilities, just because of top-ups we've done over the years (when the unforeseen happened, not for luxuries). Each has a different fixed term expiry so that they do not change all at the same time, and currently 3 are floating of which one has all the extra cash and another is the daily transaction account. Apart from not paying interest on that part of the mortgage, it is also tax free as the interest saving is not considered taxable income (unlike a "saving" account). We've run our mortgage like that for about 8 years with Sovereign.

If you have a simple mortgage then Kiwi Bank is likely good for you. If like us you have/had a few complications you probably want to go through a mortgage broker (can refer you to a good one in Auckland). We've bought a house with essentially no deposit or credit history 2 years after migrating, went through a few years of my wife (engineer) not working while we had a second property which could not generate any income and could not be sold. For those situations you need someone that can present the info in a way the bank will accept it.

Wow that sounds like a pretty complex loan structure! It looks like almost everyone is using the revolving credit facility to save on interest payments.

We've put in well over 20% as deposit and are going through a broker so we've got that sorted (we've got pre-approvals from all the major banks). Now's the fun part of finalising the mortgage structure, something I am very unfamiliar with since this is our first home purchase.

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Ragnor

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#722750 25-Nov-2012 22:25

We use revolving credit account with a 20k facility and two fixed loans on staggered terms (ie: 2ys, 18months or 3 yr).

So a 400k loan would intially look like:

RC: -15000 (out of max -20K)
Loan 1: 192500 on 2 year
Loan 2: 192500 on 3 year

We start at -15K with the aim of getting back to 0 as fast as possible. All pay goes into the RC account all bills come out of the RC account (or credit card and credit card is paid from RC).

Every time you get back to 0 you consider doing a lump sum payment from the RC to one of the fixed loans and/or increasing repayment amounts on the fixed terms. There are usually no break fees for doing this unless there is a large difference in the variable and floating rates. This allows you to be conservative with your initial repayments amounts on the fixed terms and find the right level of repayments naturally over time.

Every time a fixed loan comes comes up for refixing we consider doing a lump sum payment from the RC, or increasing repayments and we look for which term is best value at that point in time usually out of 1yr, 18mo, 2yr while also keeping the refix date staggered with the other loan to minimize the shock of both loans coming off and need to be refixed at higher rates.

You can use a larger RC or more terms as you see fit, more terms for a larger loan size etc.

Use a broker, ours just got us 0.50% off the bank advertised floating rate and 0.20% off most of the fixed terms.

Works well for us.

shreyas

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#722751 25-Nov-2012 22:27

mattwnz: A good broker should be able to recommend a good structure, and they can get better rates than you can negotiate with the bank too. Hope you didn't pay too much over the RV. The property market is a huge bubble at the moment.

We are going through a good broker atm and he will be advising us on the structure. I just want to be prepared and understand all of our options before we meet him.

We paid close to 35% over RV!

khull

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#722764 25-Nov-2012 22:39

Revolving mortgage interest rates are usually higher over fixed/floating rates as far as I am aware. I opted going for floating as I won't be dipping into the loan balance and I pay off whatever that is left over. 70/30 split at this stage. I fixed the larger sum with a mistake seeing the economy was showing a bit of heartbeat before EU going into double recession. Wishfully it should have gone further south. My mistake was not looking at the signs from Businessweek.

Having a floating rate allows you the flexibility to decide how to split your repayments. If the floating rate dips below your fixed (like how it was in the past), then you divert your repayments towards the fixed (up to 10% extra on some banks) to knock off the interest charged. If the reverse happens, you drop back down your fixed repayments to the minimum and pay off as much as you can on your floating. If the floating goes even higher you have the option to fix a portion of your floating to control your exposure.

Also look into the mortgage offset by BNZ if your loan is >100k.

Edit: other replies posted before I submitted this reply

Ragnor

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#722767 25-Nov-2012 22:44

Floating rate has been below the fixed rate a lot since the start of the financial crisis in 2008 but historically floating is higher than fixed.

Good graph here where you can compare over time
http://www.interest.co.nz/charts/interest-rates/fixed-mortgage-rates

tukapa1

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#722813 26-Nov-2012 08:36

Were with these guys;

http://www.nzhomeloans.co.nz/

Derivative of the revolving credit with a decreasing loan limit so you won't find yourself still owing the total amount of your loan in 20 years time.

Works well and we have our loan split into three - a transactional account where all of our wages go and we use as our day to day account, then two other accounts which I am about to fix.

It's kind of like a cross between a traditional revolving credit and the BNZ offset mortgage they are advertising at the moment.

THey also have a debtnav webpage which gives you a real time graph of your pay off date which involves you setting your budget and other data. It's quite motivating having a play with your budget and watching your pay off date drop months by forgoing your morning coffee everyday or stopping other non-essential spending.

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muppet

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#722818 26-Nov-2012 08:48

We used Squirrel Mortgage Brokers. Great people, I couldn't recommend them highly enough. They have consistently negotiated better rates than our "bank manager" ever has.

We (with their advice and explanations) split our loan into 3:

Revolving loan - for those ebbs and flows of money - This is about 10% of the total mortgage.

The "big" 90% chunk we split into two. Half of it fixed, half of it floating.

jonherries

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#722837 26-Nov-2012 09:11

We have just bought our second home and are about to finalise our mortgage.

Subscribe to the interest.co.nz/mortgage newsletter. Every morning, they send you the public retail mortgage rates for all the banks, along with some good articles.

Worth noting that Kiwibank has a special until Christmas for 6 months fixed at 4.85% which is pretty good.

Things I am taking into account with our mortgage:

world economic outlook and the impact on NZ - hard to determine whether it will get worse or better, so I assume not too much change either way (to me there appears to be some large downside risks due to technology, debt, the environment and politics.
changes in circumstances - do we want certainty in our payments and for how long, that certainty also means that you limit your ability to pay off more. Think jobs/salary/redundancy/kids/pets/inheritance etc.
hedging - as most people have mentioned they have split their loans into lots of parts, this limits the risk of being stung if the rates go up but also limits the benefits if they go down.

I would suggest that you do some reading about what influences mortgage rates and then make an informed decision.

For me at this point, we are probably going to put a decent chunk on the 4.85% with a plan to pay off as much as possible of the smaller chunk in the first 6 months using an offset type approach, as it generally takes that long to think about what you need to do to the house and get it organised/priced etc.

Oh and don't forget life insurance, set it at the level of your mortgage just in case.

HTH

Jon

timmmay

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#722852 26-Nov-2012 09:26

I'm 100% floating at the moment. If rates look like they'll start to rise then I'll fix, but for now I'm happy with it. I rarely actually check rates, I was surprised to see fixed terms are cheaper than floating again. I have a discount off the floating rate which makes it about the same anyway.

Fixed for 2 years is probably reasonable. You should be able to get at least 0.25% discount off standard rates, maybe 0.5% or maybe 0.75%, though I don't know if that's for floating or if they do that for fixed as well. I know when I got my first mortgage through a broker I was fixed and got a discount.

Revolving credit's very handy, especially if you have things you need to fix up on the house.

lokhor

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#722853 26-Nov-2012 09:26

This is quite an interesting discussion for me as I am currently in the middle of deciding a mortgage structure also. Due to my limited deposit I don't think I have many options. On the bright side I only paid 9% more than RV and the place is in pretty good condition :)

I'm probably going to go with a fixed rate for 2 years just to get used to paying a mortgage though and I'm currently saving for a wedding as well so that will keep costs down in the short term.

All comments are my own opinion, and not that of my employer unless explicitly stated.

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