SAVING MONEY ON INTEREST COSTS: How Having The Right Mortgage Structure Can Save You??????On Your Mortgage.
If you are one of the 50% of borrowers having to refix your home loan soon, you are probably dreading the thought of having to refix at a higher interest rate.
While there is nothing you can do about the interest rates as such, there is something you can do to save on your interest costs, and that all comes down to how you structure your mortgage.
The way you structure your mortgage can help you pay less interest overall and could take years off your home loan. A Mortgage Adviser can help you choose a loan structure to suit your financial situation, and check in with you to review it regularly as your circumstances change.?
Tailoring your mortgage to suit your own goals and preferences is something that is often overlooked.
It can be a bit of a mission to even get the home loan in the first place, so you tend to skip over the most important part, which is - how you’re going to pay it off as quickly as possible and reduce the amount of overall interest you pay along the way!
That's why working with a Mortgage Adviser is imperative in helping you achieve freedom from those mortgage payments as soon as possible. We will be able to suggest the best structure for you and align these with your goals, which will provide certainty and reassurance for you.
So what's the best way to structure your home loan??
There are various home loan structures and interest rates available, each with its own pros and cons.
Fixed-rate loans offer stability and predictability, while variable-rate loans can fluctuate with the market. Split loans provide a combination of both.
The first thing to consider when creating the best mortgage structure for you, is the age and stage of where you’re at. Are you planning a family in the coming years, and want to pay off as much as possible while earning two incomes? Do you want to start an investment property portfolio at some stage? Or are you nearing retirement and want to nail the mortgage before you stop working?
The second thing is to factor in your future plans.? Are you planning to make extra repayments, refinance, or sell the property in the near future? These factors can influence the suitability of different loan options. For example, if you plan to sell the property within a few years, then a fixed-rate loan with hefty break fees may not be the best choice.
Splitting Your Interest Rate Risk ??
Your attitude towards risk plays a significant role in choosing the right home loan structure and interest rate.
If you prefer stability and want to know exactly how much your repayments will be each month, a fixed-rate loan might be more suitable.
On the other hand, if you're comfortable with some level of uncertainty and potential interest rate fluctuations, a variable-rate loan could be a good fit.
It can be challenging to figure out which interest rate to go for. Rates have been on the rise lately and no one really knows when they are expected to come back down again, even the economists get it wrong sometimes!
So to safeguard and provide yourself with some certainty over the next while, you could look at splitting your home loan into smaller amounts and fixing them on different terms. This way you can benefit from having flexibility in case rates increase or decrease.
If you have a big home loan it can also be helpful to split this up into smaller chunks (known as tranche’s in the banking world), so you can focus on paying down one chunk at a time.
Restructuring loans into smaller sizes can also be considered, which can be done during your fixed rate renewal or by breaking the loan and restructuring it onto a new term (break fees may apply so talk to your Mortgage Adviser first).?
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Planning For Retirement ??
If you are starting to wind down and want to be mortgage-free when you retire, you will most likely have a smaller mortgage to contend with.
If this is the case, you will be paying more towards the principal than you will be paying in interest. The way to fast track your goal to be mortgage-free by retirement, is to look at the age you want to retire then calculate how many years you have left to be mortgage-free.
Let's say for example this is 10 years away, then you could restructure your remaining loan to be paid off over 10 years and plan to adjust your repayments as necessary to meet this goal. If interest rates reduce, keeping your repayments the same will reduce the loan term further. You may also be able to factor in your KiwiSaver towards the end, so work with your Mortgage Adviser to come up with a suitable plan.
The Pay Down Cycle Structure ??
A popular way of nailing lump sums off the mortgage is called the pay down cycle structure. Here’s an example of how it works:
Let's say you and your partner recently purchased your first home and you want to pay your mortgage off as fast as possible. If you’re both good with money and can keep to a budget, then the pay down cycle structure might be right for you.??
For illustration purposes, your home loan is $530,000. We take $500,000 and fix it for 1 year and set up the remaining $30,000 as a Flexible Home Loan which you plan to pay down within a year.?
You keep the outstanding balance on your Flexible Home Loan as low as possible to minimise interest costs. You achieve this by getting your income credited to your Flexible Home Loan account and managing your budget carefully. You can make your everyday purchases using your credit card and set up a direct debit to pay the credit card balance off in full each month (so you don’t get charged interest on the credit card). Note: credit card interest rates are higher than home loan interest rates. So this only works if you avoid being charged interest on your card by not making any cash withdrawals and paying the balance off in full when it's due.?
By managing this carefully over the year, you can achieve your goal of paying down your Flexible Home Loan, so you have $30,000 available to redraw. This is great timing because your fixed home loan is now due for review, so we will take the $30,000 and make a lump sum payment onto it before re-fixing. Now your fixed rate loan balance is $470,000 and you’ll start the pay down cycle again - Rinse & Repeat!
The beauty of this method is you can pay lump sums off quickly which will reduce your overall loan balance and therefore the interest costs. You also have full access to the funds in your Flexible Home Loan facility “just in case” you need it.
This option is best arranged with your Mortgage Adviser as you will need to carefully determine how much extra you can save over the course of 12 months to make it work.
Choosing the best home loan structure and interest rate requires careful consideration of your financial circumstances, goals and risk tolerance.
By understanding your options and thoroughly assessing loan features, you can make an informed decision that aligns with your needs & goals.
Remember, the right home loan structure can set you on the path to financial security by helping to reduce those interest costs, so take the time to explore your options with your Mortgage Adviser and reach out if you need a hand!
Cheers, Simon
??021 322 109
The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Simon Ward or Loan Market shall not be liable or responsible for any information, omissions, or errors present. I recommend seeking professional legal and/or mortgage advice for your own personal situation. My Disclosure Statement is available here and on my website .