Some people have very strong opinions about interest rates. (If you’re on a low equity premium, read ‘til the end).
Check out Blandon’s take: Mortgage Is Renewing? Pay Off Mortgage Faster With These 5 Steps.
I remember reading a few months ago a prominent ex-bank economist saying that now was the time to lock in for 5yrs… then a few weeks later the rates dropped again. If you followed his advice it would have probably cost you $10-20k or more for a normal Auckland mortgage.
This is why most mortgage advisory companies will suggest ‘interest rate averaging’ which is spreading your home loans into a few different fixed portions that have some renewing each year. Anyone predicting with absolute certainty about interest rates is delusional. We are all guessing.
You may split 50% into 1year to take advantage of the low rates, and 25% on each of the 2year and 3year terms to buy yourself some certainty over the repayments.
Even though all the current interest rate trends suggest rates will keep dropping, accurately predicting rates is bloody tough. They will go up sometime in the future, and when they do, you do not want to get caught out having to refix loans on 5%+ if it was avoidable.
Mortgage structure options are usually made up of a combination of fixed interest rates, floating portions. They will often consist of a blend of interest only terms and principal and interest terms. If you own one home, the use of principal and interest is most likely to be the only option offered unless the property is specifically an investment property.
The perfect structure for you will depend on many factors like your age, income, the number of properties, your stage of investing, it’s hard to determine without the exact information.
There is no perfect mortgage structure because life happens. A mortgage adviser will give you insights and things to think about and ask how you feel about your options. Having an emergency fund is important and not overestimating your ability to rapidly repay the mortgage and help you avoid having too much of your loans on floating rates (because they are usually more expensive).
Floating portions should be sized according to how much you think you will pay off each year otherwise you are probably on higher rates and repayments than you need to be. Floating portions, however, carry no/low break fees and buy you flexibility should you want to sell or refinance.
So unless you’re thinking about selling or swapping banks (because you want to buy again or consolidate debts for example) then you do not usually need to have much in floating portions. I have seen people keep hundreds of thousands on floating for years… it’s absurd as it’s just bank profit and pointless unless it’s for a good reason.
Does a 15year, 20year, 25year, or 30year loan term make the most sense?
It depends on the options you have as you may not be eligible for any term you choose but it is important to consider the bigger picture. The right mindset is to pay mortgages off quickly to get out of debt.
However, the consequences of focusing on the mortgage repayments are that you may miss out on expanding and adding to your property portfolio or other investment opportunities.
Just remember that with minimum repayments your cash savings and surpluses will build up. You can spend that money as you see fit (like a deposit on another property or for unplanned commitments). If you pay the mortgages off faster you may not be able to access that money again unless you sell the house.
You cannot always apply for equity release or mortgage top-ups. This is especially important as the time you need it the most is when your borrowing power has dropped and applying for the funds to be released is even harder (times when work slows down or you lose your job, or you are about to retire). If you can plan well, you want to keep the power to spend your money in the way you choose.
Before you commit to; Lump sum repayments, Minimum Repayments, Maximum Repayments or any other major mortgage decision, get some advice from a professional. Mortgage Advisers are cheap or even free most of the time as they are paid by the bank. A second opinion will help confirm that you are right or seed your thoughts in another direction.
Clients with 2+ properties come to us often with mortgages all over the place and benefit hugely from restructuring or refinancing, especially if they separate out a secured property (LVR and goal permitting).
If you recently bought a property and you are still paying the low equity premiums/margins (LEP) or equivalent – then there is hope for you. It is becoming easier to restructure or refinance your mortgage as a ‘dollar for dollar’ refinance to another bank, or simply a break and refix at your existing bank to get a better rate and cashback.
We find a lot of people have set mortgages up without getting the right advice and it’s simple to get a better deal even with less than 20% equity. Some banks are willing to offer closer to the low advertised rates you see on billboards for lower equity mortgage holders than others. A mortgagehq adviser will show you how.
Your journey to financial freedom will typically follow a path consisting of 3 Mortgage Lifecycle stages.
Stage 1: Reduction. Main goal: if investing – building $120,000+ of usable equity asap, or getting your home mortgage-free quickly, often in 10 years or less.
Stage 2: Expansion. Main goal: building your first $70,000 of annual rental income while refining your strategy for recycling equity, repeat, repeat, repeat…
Stage 3: Optimisation. Main goal: increase passive income to replace wage income, minimise time requirements, orchestrate big wins.
To take control over your portfolio purchase the relevant masterclass, or purchase all three for a special price of just $37 – this special offer appears when you check out.