Mortgage structure?

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Ultimate Geek

#722874 26-Nov-2012 09:55

Hey,

Just my 2c. I did some property investment seminars a few years back and one thing I remember hearing was that as a rule you should fix below 7.6% for as long as you can.

When ours came up the interest rates were really low and I got 6.75 i think for five years. As life turned out we ended up selling that house long before the 5 year period was up and I am now renting. Because the interest rate was lower than the interest rates at the time of sale, the penalties for exiting early were minimal.

I like what people are saying about revolving credits saving you money if you are disciplined. If you know yourself to not be so disciplined with money, perhaps the BNZ scheme where your savings accounts reduce your mortgage interest is better for you - especially if they can give you a savings account where you get penalized for unnecessary withdrawals.

GM.

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mattRSK

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#722876 26-Nov-2012 09:59

Some information regarding revolving credit, http://www.nexxus.co.nz/?sid=52&pid=0&nid=268

jonherries

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#722994 26-Nov-2012 12:42

I guess in summary:

1. buy low
2. sell high
3. profit!

Regs

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Snowflake

#723003 26-Nov-2012 12:56

fixed rates can be broken, and re-fixed at a lower rate, but if you're with Westpac (*) then its probably uneconomic to do so ( * based on direct comparisons a couple of years back between mortgages on ASB and mortgages on Westpac - break fees may have changed since).

don't just go for the cheapest rate, or the most 'flexible' facility. Check the fees too, including ERA or Break fees.

Break fees are less of an issue when interest rates are so low, but when they get as high as 9% they become very important!

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Handle9

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#723060 26-Nov-2012 13:47

IMO there is no right answer to this but some thing to think about when structuring your mortgage.

1. What is the nature of your income?
Is it fixed (i.e. salary only) or is there a variable component to it (over time, performance pay etc). If you have a fixed income, which is unlikely to move much then a fixed mortgage may suit you better as it limits your down side. If you have the ability to earn "extra" from over time or performance pay then a revolving credit or floating portion enables you to make extra payments which can dramatically change the repayment speed. If you are on a fixed income making higher regular repayments can work just as well as big lump sums and stops the temptation to spend your savings on shiny electronic devices.

2. Saver or spender?
Are you any good at saving or do you run out of cash before your pay comes? If you are no good at budgeting revolving credits are a great way to run up more debt. They are a bit like a low interest credit card, which can be dangerous.

3. What are your extra expenditure items for the house?
If you want to do renovations revolving credit facilities are excellent as you don't have to go back for a top up, you've already got the cash available. We have done about $45k total of renovations using up or revolving credit then paying it down again before the next renovation.

What we do is we have 80% of our mortgage fixed, with 20% on floating and a $30k revolving credit available. When we get the revolving credit down to around $0 we pay off another $5k or $10k on the floating component. We don't save any money, just pay down the mortgage and use the revolving credit as a "shock absorber" for unexpected bills or over expenditure.

We pay for everything we can on credit card to get the extra 30 days or so interest free and pay off the credit card in full every month from the revolving credit. Paying ~5.5% on a revolving credit is a damn sight better than 19% on credit cards but it does require will power to make it work.

Jeeves

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Ultimate Geek

#723115 26-Nov-2012 15:33

It would be wise to split the fixed portions of whatever setup you go with, say into having one vessel on 2 years and the other on 3 years.
Main reason being is that almost all economists expect interest rates to rise next year. So if you fixed now for 2 years for all of your mortgage, you're going to possibly see a big increase in your mortgage bill come renewal time. Splitting the fixed portion will soften that blow a bit.

Niel

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#723203 26-Nov-2012 17:52

Agree with Jeeves. And my broker gets about 0.65% off fixed rates. Currently there is a lot of competition between banks, easy to demand a discount.

With Sovereign we've found the break fee equals the difference in interest rates in favour of the bank. So if you are breaking to a lower rate, they charge you what they would have made out of you if you did not break. Your only advantage is the difference in interest rates go on your loan balance spread over the remainder of the loan (on which you pay interest for the remainder of the loan). Generally not worth it unless you need to lower your payments due to financial pressure.

With Sovereign we use our mortgage as our transaction account and there are no bank fees as long as you do not do over-the-counter transactions. It is facilitated by ASB, and just sometimes we need a cheque for which we have a cheque account from 10 years ago. Day-to-day transactions are a credit card paid in full every month, with rewards on the card (store cards are rubbish).

You can never have enough Volvos!

bazzer

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#723378 27-Nov-2012 08:04

ghettomaster: Just my 2c. I did some property investment seminars a few years back and one thing I remember hearing was that as a rule you should fix below 7.6% for as long as you can.

That's only because the long term average interest rate in NZ has been around 8%. At the moment, I would be glad I hadn't fixed at 6.75%. That's 1%-1.5% higher than the current floating rate!

minimoke

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Ultimate Geek

#723625 27-Nov-2012 13:51

OK, a couple of thoughts.
Firstly RV has NO relationship with the value of your property. It is simply a tool your council uses to divide the city up and to extract rates. Using the Rating Valuation as a means of assessing whether you paid too much or got a bargain is fatally flawed.

If you are confident with your own negotiation skills you should be able to get a deal equal to or better than a broker. If nothing else, a broker has to get paid out of the mortgage you bring him. That commission has to come from somewhere and you are the one paying it. Mortgages aren’t complex things - at least they aren’t if you don’t let the bank or broker make you think otherwise. Case in point – banks flogging swaps to farmers. The bank or broker truly has their own self interest at heart.

Next, trying to guess future interest rates is a totally futile exercise. Not even our brightest economists can get it right. At best its an intellectual discussion but one that should be put aside when working out which deal to go for today.

Interest is simply the cost of the pleasure you get for using someone else’s money to put you into a home of your own. One thing you can bank on is that interest rates will go up - you just need to make sure that you have the plan to pay for the increase when that timer eventually comes. I look fondly back on the day I was paying 25% on my mortgage.

Which deal to go for depends on your circumstances, your ability to pay and your likely future circumstances. With my last mortgage I went for 80% revolving (at a higher interest rate) and 20% fixed at a lower interest rate. The revolving suits me because I like the idea of all cash keeping the principal low. And I like the idea of being able to draw on substantial cash in the future (the bit I’ve already paid off) should I want to buy something. The fixed reminds me of my commitment to the bank to actually pay some principal off by a given date.

I can't even be bothered looking at the break fees for the fixed. I could probably cough up a fee to get a better deal I'm sure. But interest deals are just like technology - act today and there will be something better tomorrow. I’m more interested in my debt / property value ratio and doing what I can to enhance my value than reduce the cost of debt. The single biggest way off reducing your interest costs is to pay off principal.

Opps that was more than a couple of thought!

jonherries

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#723627 27-Nov-2012 13:58

@minimoke

Interesting supposition that we shouldn't rely on predicting future rates, with the subsequent comment that:

"One thing you can bank on is that interest rates will go up"

I guess it would appear to satisfy the logic that past performance is an indicator for future performance. Not to say that logic is flawless.

Jon

mattwnz

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#723636 27-Nov-2012 14:06

minimoke: OK, a couple of thoughts.
Firstly RV has NO relationship with the value of your property. It is simply a tool your council uses to divide the city up and to extract rates. Using the Rating Valuation as a means of assessing whether you paid too much or got a bargain is fatally flawed.

That is not entirely correct, and ask people in Christchurches red zones who have to sell at their RV's,. RV is the newer name for Government valuation, and the RV is what the government would buy your house back if they needed to. Such as in the case of Christchurch red zones. Many peoples RVs are not correct, but that is their fault for not getting them updated to reflect the the value of recent improvements, or the house is special in some way. This is why there is a review process for RVs when they are released. So if the RV isn't correct, the homeowner must contact the council to get them updated, as it is the homeowners responsibility to make sure the RV is correct and accurate. They will then send a personal assessor to come out and personally value your property. Our property went up 50k when we got our redone. We also have a private assessor do an assessment and their revalue was only 2k more than the RV, so the RV can be very accurate if done right.
So I would be wary of ever paying much more than the RV, depending on the date when it was done. Otherwise when the property bubble bursts, you can get caught in the trap of negative equity, which makes banks very nervous. Especially when you owe more than the house is worth in the current market. In my area house have been selling for RV or slightly below. The other thing is that house buyers, especially in a tight market, will use the RV as a price guide. Unfortunately property bubbles like the one in Auckland can cause some major problems further down the track for house buyers. Many people who have borrowed at these historically low rates, possibly couldn't afford the repayments if they rose up only a few percentage points.

mattwnz

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#723674 27-Nov-2012 15:05

jonherries: @minimoke

Interesting supposition that we shouldn't rely on predicting future rates, with the subsequent comment that:

"One thing you can bank on is that interest rates will go up"

I guess it would appear to satisfy the logic that past performance is an indicator for future performance. Not to say that logic is flawless.

Jon

In the current world situation, interest rates won't necessarily go up for some time. Banks are flush with cash at the moment and want to lend, so there are still some very good interest rate deals. It is one reason why house prices have rocketed, because people can afford to pay more, they are therefore able to pay more/outbid others. Not a good time to buy at the moment, but great if you were are seller. There are also a lot of overseas buyer buying NZ houses, due to the lack of restrictions on overseas buyers. I think they need to restrict these buyers, as all it does is push up prices for NZers wanting to buy. When I was at boarding school, all the overseas students who were here in NZ alone all had their own houses they had purchased. But you find with other countries , that they wouldn't allow this.

Niel

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#723701 27-Nov-2012 15:39

minimoke: If nothing else, a broker has to get paid out of the mortgage you bring him. That commission has to come from somewhere and you are the one paying it.

Agree with most of your comments, but not this one. The bank has to pay someone full time in case a customer wants to make an enquiry where as a broker has lower overheads and works for multiple banks. The relative cost to the bank is lower with a broker.

My broker told me what he gets. It is not that much, and it is one less think for me to do. I guess your level of income determines if it is worth dealing with the bank yourself.

On a similar note, my wife did a resource consent for us and got it approved first time. You can do anything yourself as long as you learn the jargon. In this case we saved a few thousand by doing it ourselves, and it was relatively simple. She was also able to do it after hours. NZ banks are a bit different, they don't like working on weekends.

You can never have enough Volvos!

shreyas

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#723783 27-Nov-2012 18:31

jonherries: 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

Is it advisable to go with the same bank for life/mortgage insurance? I know some banks can pressure you to buy mortgage insurance from them.

jonherries

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#723798 27-Nov-2012 19:05

mattwnz:
jonherries: @minimoke

Interesting supposition that we shouldn't rely on predicting future rates, with the subsequent comment that:

"One thing you can bank on is that interest rates will go up"

I guess it would appear to satisfy the logic that past performance is an indicator for future performance. Not to say that logic is flawless.

Jon

In the current world situation, interest rates won't necessarily go up for some time. Banks are flush with cash at the moment and want to lend, so there are still some very good interest rate deals. It is one reason why house prices have rocketed, because people can afford to pay more, they are therefore able to pay more/outbid others. Not a good time to buy at the moment, but great if you were are seller. There are also a lot of overseas buyer buying NZ houses, due to the lack of restrictions on overseas buyers. I think they need to restrict these buyers, as all it does is push up prices for NZers wanting to buy. When I was at boarding school, all the overseas students who were here in NZ alone all had their own houses they had purchased. But you find with other countries , that they wouldn't allow this.

I wasn't making a judgement on whether either statement was correct, just making the point that the two were contradictory.

I apologise, l also made an implicit comment that there is risk in predicting the future from the past.

Jon

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