Which is the best type of Mortgage?
The best mortgage is the one that gives you the greatest overall financial result. When you take out a mortgage take the time to consider the various types of mortgages that are available and think about which will suit your personal situation. Getting the best mortgage is about a lot more than getting the lowest interest rate. The main types of mortgages are:
A fixed mortgage is when the interest rate is set for a specific time frame, usually between 6 months and 5 years. The most common timeframe is 1, 2 or 3 years. The advantage of a mortgage with a fixed interest rate is that you know exactly what your repayments will be for the timeframe you have your mortgage fixed for which makes budgeting for the repayments easier. The disadvantages are that making additional payments on your mortgage can be harder to do and often has a fee involved. Also if you want to break your mortgage, maybe because you are selling your home, there will most likely be break fees. The difference between your current fixed interest rate and the market rates, the length left to go on your fixed term and the amount of your mortgage affect the amount the break fees will be. They can be in the tens of thousands.
Floating or Variable
A floating or variable mortgage is when the interest rate on the loan goes up or down depending on what the market rates are. This means your repayments will increase or decrease if your lender changes their rates, ie. if the interest rate goes up your repayments go up, if the interest rate goes down your repayments go down. This can make it more difficult to budget as your payments can change quite significantly if there are large interest rate movements. The advantage of these mortgages is that it’s really easy to make additional regular repayments or make lump sum payments enabling you to pay off your mortgage faster and save money on interest.
These mortgages come in a few varieties depending on the bank but basically they give you the structure of a regular principal repayment schedule with lots of flexibility.You can pay off as much as you like or simply pay the interest each month. You can re-borrow up to your limit any time you like giving you on-going access to credit.Since interest is calculated daily and charged monthly, the lower your average daily loan balance is, the less interest you are charged.These types of mortgages offer the most amount of flexibility; however they can be very dangerous if you are not disciplined with money. This is because you don’t have to pay off any of the principal so you can find yourself many years into your mortgage and your mortgage amount has not reduced. Revolving credit mortgages are usually linked to your main day to day bank account which can make it difficult to track your expenditure and understand what’s going on in your account.
Offset mortgages are my favourite as I think they offer you the best of both worlds. Unfortunately most of the main banks don’t offer them except BNZ and Kiwibank. They are similar to revolving credit mortgages except the interest payable is offset against all of your bank accounts. So if you have an account with some money saved for a holiday for instance that amount will be offset against the amount you owe on your mortgage. Basically it allows you to have a number of separate accounts, which usually make your budgeting a lot easier, and the amount in all of those accounts offsets the amount of money you pay interest on your mortgage.