Utilising an Offset Mortgage
Let’s have a quick look at offset mortgages. So, with a normal mortgage, what you’re doing is paying interest on the whole loan amount. So, let’s say that you’ve got 500K of mortgage and what you’ve got is 200K of savings.
So, this is your loan amount, this is how much you’ve got in the bank as savings. What you’re doing is paying interest on 500K. So, you’re 200K of savings is not helping you pay less towards your interest repayments. Now, with our offset mortgage, let’s say 500K and you’ve got 200K of savings. Now, what you’re doing is you’re actually only paying interest on 300K.
So, what that means is you’re paying 200K of loan, you’re not paying interest on that, and your savings is effectively offsetting and making sure that your repayments are being brought down. This is, you know, BNZ has got Total Money, Westpac’s got the Choices Offset, Kiwibank got a product.
You know, it’s quite different from the revolving credit products offered by different banks. So, if you find yourself in a position where you’ve got, you know, meaningful savings and you’re not really sure what you should do with it or how you should allocate that capital, then you might want to consider using an offset account because they’re relatively simple but not all banks offer it.
Fortnightly Repayment Plan
Paying your mortgage off every 2 weeks as your pay comes in, instead of monthly, might be a smart way you can pay your mortgage off a bit faster. This is not rocket science. Instead of making 12 monthly repayments, you make 26 fortnightly repayments each year (2 a month with a few days spare in most months), which is essentially like you paying for a 13th month each year.
Now if you take a normal 25yr mortgage and compare monthly repayments to fortnightly repayments, you actually save around 6years for your efforts. The compounded return of starting this early actually adds up to quite a bit. Let’s not forget though, you are paying more and this should be the result.
If you divide your monthly repayment in half, and pay that fortnightly, this is the result.
Let’s say you are paying $3,000 a month on your mortgage and you split this into fortnightly $1,500 payments, then your annual repayments go from $36,000 to $39,000
Here are the numbers for annual repayments
- 12 (months) x $3,000 = $36,000
- 26 (fortnights) x $1,500 = $39,000
There is a 13th ‘magical’ month. This difference is why you get your mortgage cleared 6 years sooner. If you get paid fortnightly and have worked out your budget, this should be easy enough.
One final note!
Make sure you don’t just tell your banker or broker to switch your annual repayments to a fortnightly pay cycle from monthly which is essentially taking the total amount you are already paying and splitting it into 26 fortnightly blocks instead of monthly blocks which barely makes it worth the hassle because you’re not actually contributing more. That would mean (from the example above) you would split the annual $36,000 paid into 26 and be paying $1,385 a fortnight instead of the $1,500 which is getting you the desired result of paying the mortgage off faster.
Interest Rate Averaging
How to structure your home loan using interest rate averaging.
If you wanted the cheapest possible interest rate today, it’s likely you would fix your whole mortgage for one year. Check out rates on our pricing page. However, this isn’t necessarily a good idea for a few different reasons. If rates next year were significantly higher, you would then have to refix your home loan at a much higher rate and face a massive increase in your interest expense costs.
Let’s look at a quick example;
If you fixed a $400,000 loan at 4.2% then the interest expense will be $16,800 for the first year.
For the 2nd year you will have to wait and see what the rates come out as, it might be lower, around the same, or higher, but you are taking that risk knowing this.
If you fix on 2yr for 4.4% then it will be $17,600 annually for the first 2years. There is complete certainty of the cost of your interest expenses which are slightly higher for the first year than they could be but you do not want to risk being exposed to higher rates half way through the 2 years by taking the 1yr rate.
But, if you split the loan and put $200,000 on 4.2% for 1yr and $200,000 for 4.4% for 2yr, you can apply interest rate averaging. This means you lock in some of the benefit of the lower rate for 1yr and get the certainty from having half the loan locked for 2yr. If after 1yr your $200,000 comes to be renewed and the rates have dropped, then you get the benefit, and if they have gone up you only have half the cost because you still have half fixed for another year.
Interest rate averaging will smooth the costs for you and make it easier to manage fluctuations in interest rates. You can see from the graph that rates can swing up and down a lot!
You can read more about rates here: https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-mortgage-rates
Likewise, if you wanted the ultimate in long-term security you might choose to put your whole loan on a 5yr rate. This is great, as long as interest rates don’t fall. If they do, you’ll be stuck on a high-interest rate. Most mortgage advisers will suggest a combination of various fixed terms and a floating portion to minimize risk. This is called interest rate averaging and protects you from making mistakes.
It’s worth considering the best way to get the best of both worlds taking 3-4 portions, and fixing them for different terms (1 year, 2 years, and 3 years for example). Over time, you’ll get an ‘averaged’ interest rate and have the opportunity to review a significant portion of your mortgage every year or two.
If you want to reduce risks, have flexibility, and get the most of discounted rates without too much exposure to massive rate hikes, then talk to us about interest rate averaging.