As opposed to that, mortgage rates that loosely follow the headline rate, have been very attractive. You can now lock in your home loan repayment for the next one year at just 3.79%. If you wish you can even lock in your repayments over the next 5 years at just 4.39% per annum.  

So, should you be fixing these rates considering they are so low, or should you not? The case for not locking in now is that the headline rates may go down even further. On the back of that, it’s possible mortgage rates could fall further. But is that certain?

There are a number of factors you should consider before you make a decision to fix, or otherwise.

Managing cashflows

Perhaps first and foremost relates to how much certainty you wish to have in terms of your cashflow to meet your regular loan repayment obligations. For some, being able to lock in a rate now means that there is certainty of cash outflow into the future.

The benefit is that it helps you better budget your income and expenditure around that amount. Depending on how much you value ‘certainty’ you can choose a timeframe that your are comfortable with. This could be over 6 months, 1 year, 2 years etc.

Instead, if the certainty of cash outflow is not of great concern to you, it is better to make a considered choice between fixing your mortgage rates versus otherwise.

Given floating mortgage rates offered by most banks are over 5.5%, there is still a sizeable margin over any of the fixed mortgage rate terms. For instance, on a loan amount of $500,000 someone on a floating rate of 5.65% would pay $28,250 in interest in the next one year. On the other hand, someone else on a fixed rate over the same time would be paying about $19,250 – a substantial difference of $9,000 in just a year. 

On the above basis, if you do decide to go for a fixed rate option, the next question is pretty obvious. How long should you fix it for? 

Spreading the bet

Recent indications, and the market commentary, indicates an emerging slowdown in the economy. Should that happen there is a potential that banks would follow suit in reducing mortgage rates. (There is always a ‘should’ with these types of forecasts).

On the other hand, proposed rule changes for banks may mean that they face higher costs for running their business. Should that get passed on to consumers that could mean that mortgage interest rates could rise. Under such heightened levels of uncertainty one option to consider is staggering the fixed rate periods.

Practically, this would mean that you split the loan outstanding into smaller portions. Then, fix each portion over different timeframes. For instance, you could lock in the 1, 2, 3 and 4 year loan rates by putting a $125,000 into each of the fixed terms. You still run the risk that in two years time the rates move lower. But, by then you would have at least some of your outstanding loan ready to be rolled over. At which stage you can benefit from the lower rates then.

You can apply this thinking in any number of ways. It is not necessary to have equal amounts in each timeframe. You could front load a majority of the loan amount to the short term. Or you could have only a smaller amount locked into a near term rate with the bulk of it locked in over a longer term.

Shop around for the best home loan mortgage rates here.

The post To fix your mortgage rate, or not, that’s the question appeared first on PocketWise.

Banks have been the ubiquitous provider of various financial services and products for centuries. They continue to be the go-to for most things financial – you need a home loan you go to your bank, you need a credit card you turn to your bank etc.

While technology has enabled a number of non-banks to start providing alternatives, by a significant majority the banks still command a massive user base. But, that doesn’t necessarily mean that this will continue to be the case. There is no debate that typically the banks user base is a very sticky one. Meaning, most of us can’t be bothered moving banks even when we may not be entirely happy with our experience dealing with them. But, given it’s your hard earned money, it may pay to wrestle for it!

Coping with bad behaviour

A recent review of New Zealand banks has highlighted a number of shortcomings within these long established institutions. Many of these issues have a direct impact on how we, as consumers, are served. Fair to say, Kiwis appear not to have been as hard done by as consumers in other countries – at least not at this stage. The sentiment towards banks in the US, UK and Australia for example are sharply far less trusting.

There is no one best solution to tackle the issues raised by the review. One obvious solution may be to regulate the banks more. That is to say, put more rules and constraints around what they are and are not, allowed to do. As obvious as it may sound, the solution could potentially have unintended consequences. Additionally, you and I as individuals may not be able to influence that decision much.

Vote with your dollars

But, you and I can influence behaviour, by refusing to accept bad behaviour. Practically what that would look like is to actively make decisions to shop around for alternatives if we are not treated fairly. Commercial threats such as losing a customer can be more effective in managing bank behaviour than the spectre of regulation (which typically benefit the legal fraternity and raise costs to consumers!).

On the other hand, when you actively decide to switch your bank you will most likely incur nil costs (except in some circumstances). Furthermore, you will likely end up with more cash back in your pocket as you identify deals from other banks when shopping around.

As an example, say you decide to take a $600,000 loan over 30 years. At a 4.5% interest rate you will pay about $495,000 in interest. Should you get an offer for the same loan at 4.2% elsewhere, you would end up paying only $456,000 in interest – that’s nearly $40,000 more in your pocket!

Now imagine you propose to the bank that you are going to take your business elsewhere. That’s a half a million dollar at stake for their business – enough incentive for forcing the best outcomes for yourselves.

We would love to hear what you think of your bank and your experiences with them. Click here to have your say and find out and see what others think.

The post How well do you rate your bank? appeared first on PocketWise.

Broadly, loans are of two types – table loans and interest only loans. The mechanics are straightforward. The bank or lender offers you the loan amount, and as a guarantee takes a mortgage on the property. This is the guarantee against you not being able to repay the loan by the amounts you have committed to repay and in the frequency you have agreed to repay. The mortgage on the property means that the bank is then able to sell the property to recoup their loan to you, should the above crisis happen.

If you take an interest only loan, your regular repayments are based only on the interest rate charged on the total amount of the loan (called the principal). At the end of the loan period (usually under 10 years), you are expected to repay the principal in full.

As opposed to the above, if you take a table loan, your regular repayments will not only include the interest amount charged but also a small portion of the principal, which is paid over the life of the loan (typically up to 30 years).

As a result, your regular repayment amount will be higher under a table loan versus under an interest only loan. Also, remember the total loan outstanding over the period of the loan will remain the same for an interest only loan and will fall gradually for a table loan.

There are a number of times when interest only loans could be considered in your mix, including when:

• You want to commit to lower payments to start-off, given your income profile
• You want to secure that extra special property that may be affordable only if you went for lower payments (as you will need to take a larger loan)
• You know that you may be holding on to the property only for a short time
• You have investment savvy to identify other higher return opportunities that you can invest your money in
• You have a sizeable equity in the property.

However, much of the above benefits are eroded away if you lack discipline and/or plan properly, including when:

• You forget that at the end of the interest only period (which is shorter relatively) your repayments are going to jump significantly, given that you have a commitment to repay the capital or re-structure your mortgage
• You don’t factor in the reality that over the period of the loan, the interest rates will have moved around and a rise in interest rate will severely impact how much you have to repay
• You end up spending the money you have left over from not paying part of your principal on things other than investments and savings. For e.g., on holidays, entertainment etc.

As you can see, interest only loans are not for everyone – but, if used wisely and in a disciplined fashion, it has a number of benefits. Once you have figured out which route to take – i.e., whether a table loan or an interest only loan, it is critical you ensure you have the best deals on mortgage rates.

You can compare home loan interest rates here within a few minutes and look for the features and terms that best fit your budget.

The post Should you consider an interest only loan? appeared first on PocketWise.

The loan you have on your property ties you into an obligation to make regular repayments to your bank, or the business lending you the money, over a number of years. The loan is awarded to you based on mortgaging the property to the bank – this is to cover the bank for the risk that you may not make good on your repayments.

The cost to you for borrowing that money is determined by how long you have taken the loan out for – meaning, the period of years by the end of which you commit to repay the lender the entire loan amount. Home loan mortgage rates in New Zealand currently range anywhere from 4.39% to 4.85% if you decide to fix the rate for the next 3 years, depending on which provider you choose. On the other hand, if you decide to not to fix your mortgage rate (variable), providers offer rates anywhere between 5.75% and  5.95%.

So how do you decide whether to fix your mortgage rate, or not?

If you lock in the cheapest variable mortgage rate today on a $500,000 loan, the cost to you will be 5.75% – approximately, costing you $86,250 over the next three years (on an interest only loan). This is assuming there will be no changes to rates in that period.

On the other hand, if you locked in the cheapest 3 year mortgage rate, your cost will be only $65,850 over the same time. That’s a saving of $20,400 in 3 years.

Should mortgage rate rise over the next 3 years, it may be better to fix it at a lower rate today. Instead if mortgage rates were to fall over the next 3 years then it may be better not to fix it. But given that variable rates are at a margin above the fixed 3 year rate, variable rates will have to fall by about 1.25% on average before they become as compelling as the fixed rate.

Longer term mortgage rates are determined by banks, typically based on the rate at which they can borrow from international banks. While there is no guarantee, you should expect long term mortgage rates in New Zealand will trend along with changes in interest rates overseas. Shorter term rates on the other hand are driven by a range of reasons including competition between banks as well as the level of the overnight cash rate (or the short term borrowing cost, set by the Reserve Bank of New Zealand).

Borrowing costs in the US have been trending steadily up over the last 18 months and is largely expected to trend upwards (assuming no major economic issues). On the other hand, short term borrowing rates in New Zealand are largely on hold and may even see the possibility of a cut.

If you are none the wiser about which way rates may trend, your decision to fix or not should be determined by your sense of comfort. Locking in a rate today ensures you know exactly how much you would be paying over the period you have chosen.

If you didn’t want to be exposed either way for too long, you could always choose a shorter period like 18 months. The cheapest 18 month mortgage rate now is 3.99%.

The Pocketwise Team

The post Mortgage rates as cheap as chips at under 4% – to fix, or not to fix? appeared first on PocketWise.

The concept of resilience is relevant across all aspects of your financial make up – whether that be managing your debt or saving for your future. We all take on debt in various forms. By far, our largest debt at some point in our lives will be the loan we take out for the purchase of a property. Of course, you may at times have to depend on a personal loan as well to make some big ticket purchases like a car. All debt needs to be repaid and most of them come at a cost. Typically, that cost is the interest charged on the amount you borrow. Debt also comes with conditions around when you should pay back and how much, along with the consequences of you not paying that as per those terms.

Which all makes it look bad to have debt. But the fact is, having debt in itself is not bad. In fact, there is something called smart debt, for example – taking a loan on the basis that you are able to apply that money you borrow to an initiative that earns you an amount bigger than what you have to pay back with interest. But, a lot of the debt you see around you, is pretty dumb. Why?

Because the money borrowed goes towards things that get consumed in time (like a car or a handbag or a shoe etc.), not towards things that generate more money.

Debt – long term (home loans, consumer loans etc.)

Home loans and consumer loans allow you to borrow money from a financial institution to give you access to money which can be put towards the settlement of the property or item you purchase.

The condition is that you pay back the amount you have borrowed in small amounts over a number of months and years. In order for you to access that money, the institution charges interest on the amount you borrow. The entity lending you the money will typically also want some guarantee over your ability to pay (called ‘collateral’). In the case of a home loan, the property itself happens to be the collateral.

Being resilient means being able to repay the amount agreed to the lender in the regular time intervals agreed. So the key here is to ensure that you have enough cash flow to satisfy those repayment commitments as and when they fall. It doesn’t matter how wealthy you are or how many other houses or other assets you own. The only question is – can you generate enough cash at these regular intervals? Either from a salary or an income or by selling your assets (god forbid!).

A big part of being financial resilient is being smart about how you mange your money. Do you know if you have the smartest and cheapest loans possible? There is a wide variation in how much interest you are charged on your loan.

Compare the most popular mortgages and personal loans in the market on PocketWise!

The PocketWise team

The post Money Week – How to manage long term debts appeared first on PocketWise.

While negative gearing is more relevant to investors than property newbies, there’s a high chance you’ll come across the term at some point in your quest to purchase your first home – and even if you don’t, negative gearing is going to affect you anyway.

What is negative gearing?

Negative gearing is when an investor takes out a loan to purchase an investment property and the costs involved with holding and managing said property are higher than the gross income the property generates. A savvy investor can then write this loss off against their income, reducing their overall tax bill.

Here’s a (very simplified) real world example:

Sally earns $60,000 a year at her job.

She purchases a rental property and rents it out at $25,000 a year, but pays $30,000 a year in rates, loan interest and other expenses.

When it’s time to pay her taxes, Sally writes off the $5,000 loss against her $60,000 income, reducing her taxable income to $55,000 and slashing her tax bill by $1,500.

Sally hopes that when she sells the property the capital gains will outweigh her short term losses.

Why are so many people critical of negative gearing?

Negative gearing cops a lot of flak because it encourages over-investment in property, which in turn results in heavily inflated property prices. Many believe that negative gearing is at least partially responsible for the current affordability problems in many parts of the country. Inland Revenue disclosed that in 2014 rental property owners claimed about $780 million in tax losses, or wrote off as much as $250 million, as reported by the NZ Herald,

New Zealand is one of very few OECD countries that allows unrestricted use of negative gearing, and it is becoming an increasingly important economic and political issue.

The post What is negative gearing and how does it affect me? appeared first on PocketWise.

A quick look at the data

The study, which was carried out by Digital Finance Analytics (DFA), analysed the financial headroom of 26,000 Australian households, and concluded that 1 in 5 (20 percent) Australian households would experience financial difficulty if mortgage rates were to rise just 0.5 percent.

“This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards,” (DFA) wrote, as quoted by the NZ Herald.

The DFA’s findings hit close to home, given that similar factors are tipped to shape New Zealand’s property market in the months and years to come.

Fixed interest rates on the rise

In fact, we’ve already seen a number of mortgage providers raising their fixed home loan interest rates this year.

As the NZ Herald reported, SBS bank, the Co-operative Bank and Kiwibank have all increased interest rates on their fixed mortgage products twice this year, while ASB is expected to roll out similar hikes later this week. Over the past year, the average interest rate for a two-year fixed-rate home loan increased 13 basis points from 4.74 to 4.87 percent.

Using a New Zealand mortgage rate calculator will help you find the best deal in the here and now – but rates change. As such, it’s critical that you have a reasonable amount of ongoing financial surplus when purchasing a home so you can roll with the punches when the economy shifts.

The post Will you lose your home if mortgage rates rise? appeared first on PocketWise.

Here are three things to keep in mind when considering taking out a fixed rate home loan:

1. Restrictions on extra repayments

Most fixed rate home loans have restrictions and/or strong disincentives (such as expensive fees) in place to prevent you from making extra repayments on your mortgage. This means that your home loan could take longer to pay off than it would under a floating arrangement, and expose you to unnecessary interest.

2. Market rates could drop

Fluctuations in the Official Cash Rate (OCR) do not affect fixed rate home loans – and this is both a blessing and a curse. If the OCR increases, you don’t have to worry about repayment hikes and sudden financial stress. However, if the OCR decreases, the economic benefits do not trickle down to fixed rate home loan customers, which can be incredibly frustrating.

3. Break fees

Almost all fixed rate mortgage products come with large break fees. If you choose to sell your property or prematurely terminate the home loan agreement for some other reason, you’ll be forced to pay a substantial penalty. Be sure to check the fine print before signing anything!

There are many pros and cons to the various home loan products in New Zealand, and what’s right for one person may not necessarily be the best option for you. Hop over to our home loan comparison tool for more insight into current fixed rate home loan options and take the next step in the home owner journey.

The post What are the cons of a fixed rate home loan? appeared first on PocketWise.

We’re talking, of course, about mortgage brokers. A mortgage broker essentially acts as a middleman between you and home loan providers, and really can improve the approval process from beginning to end. How?

Better rates: Mortgage brokers typically have access to a bunch of different products across a range of lenders, enabling them (and you!) to quickly compare rates and negotiate with banks to find the home loan that best suits your circumstances.

Industry pros: Do you know what an acceleration clause is? What happens when your guarantor goes missing? Any idea what constitutes a ‘reasonable’ lending fee? Mortgage brokers deal with home loans day in, day out, and can help you decipher contract small print to ensure you’re not getting ripped off.

Impartial advice: Unlike lenders, brokers have relatively little interest in which mortgage you ultimately choose. As such, they’re a pretty good source of impartial information and advice.

Strong relationships with banks: The chances of your mortgage application being approved largely comes down to whether a lender thinks it can trust you. Good brokers have strong relationships with many different banks, which can speed up the application process and boost your chances of securing a home loan.

Free: The icing on the cake is that using a mortgage broker is completely free! They get paid by the lender, so you don’t have to worry about yet another cost to buying a house.

While there are many benefits to using a broker, it’s important to keep your options open. In addition to talking to a broker, be sure to check our New Zealand mortgage rate comparison tool for up-to- date insight into the best home loan rates in Aotearoa.

The post Why use a mortgage broker? appeared first on PocketWise.

Apartment living is on the (high)rise

Mullets may have come and gone, and floral-print wallpaper might have fallen from retro into passé, but one trend that has remained constant over the years is the great Kiwi migration from house to apartment dwelling.

Nowhere is this movement more noticeable than in Auckland. The number of Auckland apartments skyrocketed from 9,876 in 2006 to 15,645 in 2013, according to census figures reported by Statistics New Zealand. This represents an incredible increase of 58.4 per cent!

Why are apartments becoming more popular?

It’s easy to understand why so many people are moving into apartments. Not only are they generally more affordable than free standing houses, they also offer a level of convenience that can’t be found in the suburbs. The practical benefits of living within close proximity to work, schools, transport routes and other key infrastructure should not be underestimated.

Can you use KiwiSaver to buy an apartment?

In a word, yes. While there are some conditions to leveraging your KiwiSaver to purchase a home, there are no restrictions on the type of property you can buy.

However, as Bankers’ Association Chief Executive Kirk Hope explained, mortgage providers may be more cautious when lending to apartment buyers.

“When lending on small apartments, the bank needs to consider if it will get its money back in case of default. It may not where demand for very small residences is limited,” said Mr Hope, as quoted by NZ Herald.

When you are ready to take the next step, talk to one of our great experts, their service is totally free!

The PocketWise Team

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