What’s the difference? Mortgages explained.

What are some of the different mortgage options?

So, you have been approved for a home loan and now the bank has asked you to choose a mortgage facility. How do you know what is the best fit for your situation? We have broken down the different mortgage product options for you below, so you are ready to talk to us about which option you think will suit your needs best.

A Fixed Rate Mortgage*

This is very common in New Zealand. This is where you will know exactly how much your home loan repayments will be by fixing your rate for a set period of time.

· The interest rate and repayment amount will stay the same for the fixed rate period offering you security and stability over the fixed term.

· When the fixed rate period ends, you can choose to fix it at another rate, or let your loan roll onto the floating rate (explained below). 

· Fixed home loans generally have lower interest rates than floating or flexible home loans, but they offer less flexibility to make extra repayments.

A Floating Rate or Variable Mortgage*

This option allows you to make extra repayments, without limit or penalty, to pay off your home loan sooner.

·       The interest rate can move up or down in line with market changes – which means your repayment amount can change. This can add a little uncertainty.

·       The interest rate is generally higher than fixed home loan rates, but you have the flexibility to make extra repayments whenever you like.

A Flexible or Revolving Credit Loan*

If you're disciplined and good at managing your money, this option can help you pay off your home loan sooner. It also gives you access to credit when you need it. 

·         Interest rates can move up or down in line with market changes .

·         This home loan is a revolving credit facility on your everyday transactional account, a bit like an overdraft. There is normally a limit to this, so you won't tend to have all your home loan borrowing in this type of facility.

·         You can pay money into it whenever you like and redraw it if you need to. 

·         You’re charged interest on the outstanding balance, but there are no set repayments. 

·         It often has the highest interest rate and a monthly fee, but it offers the most flexibility.

Offset Mortgage*

This is a type of variable rate mortgage, whereby the amount of money you have in other accounts can be subtracted from your mortgage balance before the interest owing is calculated.

·        The accounts don’t necessarily need to be yours. If you have family members at the same bank, their accounts could be linked to yours, but they normally will forfeit any interest they might have earned for the period they are linked to your account, saving you interest.

·         It’s an easy way to save on interest and to repay your mortgage faster.

·         The interest is calculated daily, so having your salary paid into a linked (offsetting) account immediately reduces the interest charged and continues to do so (to a lesser degree) as you gradually spend your wages.

·         If you use a credit card for most of your purchases and pay it off in full at the end of the interest-free period each month, you’ll save even more.

What is all the jargon?

LVR – Loan-to-value ratio is where the bank may have a limit of how much they might be willing to lend on a property i.e. for some property types such as apartments some banks will cap their LVR at 80% so on a $500,000 apartment the maximum you could borrow would be $400,000 ($500,000 x 80%).

UMI – Uncommitted monthly income is a term used by mortgage lenders to describe how much income you have left over each month after paying for your living expenses and ‘fixed payments’. Fixed payments usually include the regular repayments you make for mortgages and other debts. Your UMI provides some indication of how you might manage financially in the face of events like mortgage interest rate increases and a loss of income. It indicates the strength of your financial position.

DTI – The debt-to-income ratio compares a borrower’s total debt with how much they earn. It’s usually reported as a simple number, not a percentage. The DTI is used to measure a borrower’s ability to keep up with their regular repayments.

*Please note different bank’s T&Cs may apply.

**If you want personalised advice around any of these options do get in touch with us, we’re keen to help you.