Day 20

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.