Is Kiwibank giving me the right information about mortgages?

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Forums › Finance and wealth management › Is Kiwibank giving me the right information about mortgages?

sparky1685

82 posts

Master Geek

#243715 28-Dec-2018 09:21

We have part of our mortgage fixed with Kiwibank for a year, and at the start of the loan, fixed our repayments at more than the minimum permitted. In previous years, we've made lump sum repayments when we've had extra cash in the bank, which Kiwibank allow for up to 5% of the initial loan amount:

https://www.kiwibank.co.nz/personal-banking/home-loans/managing-your-loan/pay-your-loan-off-faster/

https://www.kiwibank.co.nz/personal-banking/rates-and-fees/limits/home-loans/

I'd understood this as meaning that the additional repayments (on top of our agreed regular payments) could total 5% of the loan amount, but this year they are telling me that the 5% limit includes any repayments made by having the regular repayments greater than the minimum weekly repayment. In other words, it would only be possible to make a lump sum repayment of 5% of the loan amount in a year if you had elected to make the minimum weekly repayments from the start of the loan term.

Have I just misunderstood this completely, or is Kiwibank's wording ambiguous? In the second link above, "Example 1" doesn't include any mention of "But you can only do this if you have set you repayments to the minimum allowed".

mudguard

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#2151318 28-Dec-2018 09:31

I would think it would simply 5% of the loan when you fixed, if you have already paid this by having larger than required repayments then you are probably out of luck.

Could you restructure a smaller amount to floating when it comes off it's fixed? That would be easiest, then you can pay as much as you want off, whenever you like, and possibly draw down again if you had to.

NB check with Kiwibank, not all banks allow you to pull funds out of floating loans.

Geektastic

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#2151319 28-Dec-2018 09:31

This is your fish hook:

"You can make extra payments in any year of a fixed term loan of up to 5% of the loan amount, either through increased repayments and/or lump sum payments."

tdgeek

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#2151324 28-Dec-2018 09:35

I agree with them. I see from the examples that you can pay the minimum, plus 5% of the original principal. If you paid more than the minimum, that reduces the lump sum capability.

marpada

475 posts

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#2151326 28-Dec-2018 09:40

Have you asked what the fee for putting lump payments over the 5% is? It might be just a few dollars.

dafman

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#2151331 28-Dec-2018 10:08

Can you shift the extra principal repayment you wanted to make to the floating component of your mortgage, so you are still reducing the overall principal by the desired amount?

eracode

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#2151335 28-Dec-2018 10:19

marpada:

Have you asked what the fee for putting lump payments over the 5% is? It might be just a few dollars.

That could well be correct.

This is the topic of Early Repayment Charges (ERC). If you fix a loan rate for say 6% for five years, to fund that loan the bank will 'match' its borrowing, with a borrowing of its own of five years.

Then if you want to repay after, say, two years - the bank will be left in an 'unmatched' position. It will still have the liability of the loan it arranged to fund the loan it made to you - but will no longer have the corresponding asset of its loan to you. To get back to a matched position, the bank would need to re-lend the amount you repaid early for the remaining three years. However rates will have changed in that first two years of your loan - and may have moved against the bank.

To protect itself from this, the bank will look at your 6% rate and compare it to the home loan rate for the un-matched remaining period i.e. 5 - 2 = 3 years. If the 3-year rate at that time is, say, 5% (i.e. less than the rate you agreed to) an ERC will arise, calculated on the amount you wish to repay, the 1% rate differential and the period.

If the 3-year rate at that time is 7% (i.e. more than the rate you agreed to), no ERC will arise. Logically and theoretically, the bank should pay you money in this situation but of course it doesn't work that way. Heads they win, tails you don't.

To give their customers a bit of flexibility and some relief from these charges, banks allow up to 5% of the initial principal amount of the loan to be repaid in any 12-month period without any ERC being payable.

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afe66

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#2151369 28-Dec-2018 10:24

I had a kiwibank mortgage that was part fixed and part current account floating.

At the time (10yrs ago) if the interest in floating was higher than fixed there was no penalty to transfer debt from the lower fixed to higher floating account. So when I got lump sum payments from unused annual leave I would ring up kiwibank and transfer the debt to higher floating account then pay lump sum from work into that account. This didnt get caught by the 5% penalty rule. Yet essentially meant I was making penalty free lump sums into the fixed component of my mortgage.

Surprised me so much I didnt believe the lady on phone until I had spoken to several different people.

In the end probably made 50k+ of penalty free lump sums in addition to extra payments where the salary had reduced the current account floating balance to zero where we would then transfer another 10k debt across. We were double income no kids and once student loans paid off we hammered our mortgage.

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tdgeek

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#2151371 28-Dec-2018 10:30

dafman:

Can you shift the extra principal repayment you wanted to make to the floating component of your mortgage, so you are still reducing the overall principal by the desired amount?

Best suggestion in the thread. Obvious when you think about it! Doesn't matter what you reduce, apart from a small interest difference. Circumstances also mean next time you need to re sign, adjust the fixed and floating to allow for lump sum

eracode

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#2151372 28-Dec-2018 10:42

dafman:

Can you shift the extra principal repayment you wanted to make to the floating component of your mortgage, so you are still reducing the overall principal by the desired amount?

That would work but OP doesn't actually say that they have a floating component. Sounds like he might have two or more fixed components - "We have part of our mortgage fixed ... for a year".

I'm guessing that if there was a floating component they would simply have done that because it's obvious - and this query would not have arisen.

Sometimes I just sit and think. Other times I just sit.

jonathan18

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#2151440 28-Dec-2018 13:52

We've had our mortgage with Kiwibank for about 10 years, and as far back as I can remember, it's always worked the way they explained it to you - ie, the 5% calculation includes any regular additional payments over the agreed minimum as well as one-off lump sum repayments.

That's why whenever we've re-fixed a mortgage we've juggled the length of term to ensure a 'minimum' that's as high as we're comfortable paying, thereby maximising that 5% for additional repayments above this amount. TBH, we've never asked to see if they'd waive any fees associated with repaying above 5%, but rather have just plonked on the additional amounts the day of the loan's anniversary.

sparky1685

82 posts

Master Geek

#2151861 29-Dec-2018 13:40

Thanks for all the replies. The rest of our mortgage is on an offset floating rate, but we've already filled the linked account to the level of the mortgage, so I guess we'll just put the extra money away to earn some interest until the loan anniversary.
It's not going to be a big deal, but I still wish the examples in the terms and conditions made things a bit more explicit - had I realised how things worked I would have shortened the loan term at renewal so that our desired weekly repayments worked out to be the minimum.