2 Nov 2017

Mary Holm on mortgages

From Jesse Mulligan, 1–4pm, 2:16 pm on 2 November 2017
Mary Holm

Photo: RNZ/Claire Eastham-Farrelly

Fixed, floating, revolving, long-term, short-term... How do you work out which mortgage is best for you?

A mortgage is a "huge big loan" that it's worth putting some thought into, says personal finance expert Mary Holm.

Mortgage advisors and brokers (the same thing, as far as Mary can tell)

You can often get free advice, but keep in mind advisors and brokers are usually paid by the lenders, Mary says.

Because they get a commission from banks, mortgage advisors tend to steer people towards lending from the bank they will get the highest commission from.

"If you go to them and through them, you end up with a loan with Bank X, then Bank X pays them money for doing that."

Before you commit to a mortgage advisor, email or call them. Ask about the commissions they get from different lenders and which lenders they don't work with.

Go to those lenders and ask what they can offer, then take that back to the broker and ask what they can do, Mary says.

Fixed or floating?

The obvious advantage of a fixed rate is knowing where you stand, while with a floating rate, if you are able to pay the loan off early you can or put lump sums into it.

A lot of people take the option of a one-year fixed rate because it is cheapest.

Keep in mind you can't count on a fixed rate remaining lower than a floating. (Between 2009 and 2012, the floating rate was lower than fixed).

Because you can't tell what's going to happen in the future the smartest thing to do is go half fixed and half floating, she says.

Add a mixture of short-term and long-term to the split.

"So have half of it floating and then another half fixed, and of that other half have a quarter [fixed at] one year and a quarter [fixed at] five years, or go a third floating, a third short-term, a third long-term."

When your fixed term ends

Talk to your bank about options for increasing payments in the future.

Some lenders will let you increase regular payments without penalty.

"You've got more bargaining power at that point. They might let you then specify in the loan that you can increase your payments by $1,000 or whatever it might be."

house with blue sky

Photo: Public domain

Consider all of the options

Revolving

This can work well if you have an irregular income and a bit of discipline, Mary says.

"You get your income in there as soon as possible and pay your bills as late as possible."

Redrawable

This is the simplest and easiest to control, says Mary.

"You have an ordinary mortgage and a minimum payment but you can pay more off it if and when you want to – as a one-off or regularly. You can also park money in that account and use it later."

"You've got your mortgage sitting there and you can just stick any spare money into that account to reduce the mortgage balance for a short period and take it out whenever you need it."

Offset

"You might have an everyday account and a savings account and the balance of those is offset against your mortgage. If your mortgage is, say, $200,000 and you have $5,000 in savings, you'd be paying interest on $195,000 instead."

Be wary of cash incentives when taking out a mortgage

"Money in the pocket right now is awfully appealing and the people who are offering it know that. Therefore, they're probably not going to give you such a good long-term deal."

Don't succumb to financial pressure

Say 'I want at least a day to think about it'.

If they then say 'You're going to miss out, it's only good for today' walk away, because that almost always means it's not a good deal, Mary says.


Mary Holm is a columnist, author and educator. She discusses investment, shares, mortgages, Kiwisaver and other personal finance issues with Jesse Mulligan every second Thursday. Check out past episodes here.

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