The moment has come for mortgage holders as mortgage interest rates are finally getting better!
The OCR has been cut twice with predictions of further cuts on the radar.
It’s all great news.
The question that is often asked – what do you do in this interim period when rates are tracking downwards, yet promise to go lower still?
Should you fix interest rates, or should you maybe consider a floating interest rate?
Let’s look at your options.
What Is a Floating Interest Rate?
A floating interest rate will go up or down in line with the market. This means you’ll pay less interest if rates fall, but your repayments will increase if interest rates go up.
What Impacts a Floating Interest Rate?
The interest rate can fluctuate depending on factors like the official cash rate (OCR)set by the Reserve Bank of New Zealand (RBNZ) and market demand.
Economic conditions such as inflation, unemployment, and GDP growth, will also impact the floating interest rate.
Considerations For a Floating Interest Rate Mortage
There are several reasons why you might choose to “float” your mortgage payments:
1. Flexibility
You can make extra repayments or pay off your loan early without incurring penalties, which can help reduce the overall interest paid over the loan term.
This can be helpful if you are planning to move soon or to make a lump sum payment off your mortgage.
2. Interest Rate Decreases
If interest rates do end up decreasing, a floating interest rate lets you take advantage of lower repayments immediately, as your mortgage rate adjusts to reflect the new market conditions.
3. Short-Term Solution
A floating interest rate can be ideal if you expect to refinance, sell your property, or switch to a fixed-rate loan shortly.
This helps you avoid the restrictions and break fees often associated with fixed-rate loans.
While there are good aspects to choosing a floating interest rate, there are also potentially negative aspects to consider:
1. Higher Interest Rate
Because floating interest rates offer borrowers additional flexibility over fixed rates, they tend to have a higher margin added to the base (OCR) rate than the fixed rates that the banks offer.
You would need to factor in the additional cost that a higher rate attracts to work out whether it is the best financial option for you.
2. Exposure to Higher Repayments
Depending on the market, the interest rate may float upward and increase a borrower’s repayments, even perhaps to the point of making those payments out of reach for the borrower.
Floating interest rates do not tend to drop as quickly as fixed rates in a weaker economic cycle, so you could end up paying a higher rate unnecessarily.
3. Budgeting Challenges for Borrowers
A floating rate loan is unpredictable, making it tough to budget cash flow and calculate the long-term costs of borrowing.
As a borrower, you are exposed to market conditions. Floating interest rates can increase without warning daily.
This is especially challenging for borrowers who do not follow or understand market fluctuations and the impact they can have on their floating mortgage repayments.
Should You Fix or Float Right Now?
As a general rule, choosing between a fixed and floating interest rate will depend on your current financial situation and property plans.
If flexibility is a priority and you are comfortable with potential repayment fluctuations, then a floating interest rate might be suitable in the short term.
However, if you want to secure the best rates possible and prefer consistent repayments over a longer period for budgeting, a fixed interest rate is probably the best for you.
Most New Zealanders do prefer fixed interest rates compared to floating interest rates with most mortgages currently on fixed term rates.
Are Floating Rates the Right Option for You?
The question does need to be asked – Are floating interest rates the best option with interest rates tracking down?
It will definitely cost you more to service a floating interest rate mortgage as current floating interest rates are upwards of 7.5%.
At the time of writing this newsletter, a fixed rate can be secured for 5.99% for 6 months.
If you are planning to sell your property soon or your fixed rate is due to expire around the time of a pending OCR decision, a floating interest rate could be a good interim measure.
What About Refixing with Your Bank?
With interest rates currently falling faster than we’ve seen in a long time, you might be wondering when you should refix your mortgage if your fixed-term rate is up for renewal.
The answer is… depending on your circumstances, wait as long as you possibly can!
Most lenders will start the discussion of refixing a couple of months out from your current fixed-term expiration date.
But, with interest rates currently decreasing on what seems like a weekly basis, you could end up paying more interest than you need to by refixing too early.
Interest rates could fall by half a percent (or more) in two months and the difference it could make in your repayments could be significant.
That could be extra money in your pocket, which is very helpful for many families in the current cost of living crisis.
Further OCR Reviews
With the Reserve Bank set to make another OCR decision on the 27th of November, it would be sensible to delay refixing until after that time.
It is expected that the OCR will be cut further in the November meeting, which we hope will drive interest rates down even further.
There are further reviews in February & April 2025, so if you do choose to refix rather than float, then a short-term fixed rate may be the right option for you.
Check with your Adviser – Review & Refix Service
If you are in doubt about what’s best for you, I’m more than happy to have a chat about your individual situation and help find the best solution for you.
We can offer tailored advice based on your financial goals and situation, aligned with what we believe is the best choice in the current market.
Reach out to our team today for a no-obligation chat.
Until next time,
Oliver
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Frequently Asked Questions
Why use a mortgage broker?
The advantage of using a mortgage adviser is that they can negotiate with a number of lenders to find the deal that best suits you. They do all the leg work for you, saving you time.
Why don’t I just go to the Bank myself?
We help assess all your options, whereas the Bank is restricted by being only able to present one view.
Is it better to use a mortgage broker or a bank?
While banks expect the client will negotiate with them, or accept the given rate, mortgage brokers are more likely to go to bat for you, to get a lower interest rate.
Why choose Oliver Broomfield Mortgage & Insurances?
Our processes make financing your house purchase easy; providing quick personal service that takes the stress out of financing your home loan. With our wealth of experience in the finance industry, we know how to get the best deal for you.
Can I organise a mortgage without meeting in person?
Absolutely! We can still work with you using email, phone calls, and video calls. Whatever your financial situation is, we have a range of options to communicate with you whatever circumstances.
Can my application be done via the internet?
Yes, we have an online application system or a pdf form that can be completed. Supporting documents can either be uploaded directly into our system or emailed. We can use telephone, zoom, or email for further clarification or look at scenarios and receive and send information.
What is a home loan pre-approval?
A home loan pre-approval is a conditional approval confirming that we can lend you a certain amount of money, provided the property you purchase meets the lender’s home loan criteria. It’s a good idea to ask us for a home loan pre-approval before you start house hunting. It will help you determine how much you can borrow and to give you some bargaining power when negotiating a purchase price.
How much deposit do I need?
Saving a deposit is probably the biggest hurdle for most first home buyers. First home buyers need to have saved at least 5% deposit with 20% or more being the optimum. Remember that this can be made up from a KiwiSaver first home withdrawal and some first home buyers may also be eligible for a HomeStart Grant. Gifts and deed of debts from friends and family are also common.
Can I buy with less than a 20% deposit?
While there has been a lot of publicity about the need for home buyers to have a 20% deposit; there are still options available for you. We can talk you through what may be available to you including:
- The ability to access low equity loans
- Using your Kiwisaver contributions towards your deposit
- Building your own home
- Accessing parental assistance to increase your deposit.
Why does the size of my deposit matter?
The size of your deposit makes a big difference to the interest rate and the other costs you could potentially pay on your home loan. Generally, for lending where the deposit is less than 20%, the lender will also charge a Low Equity Fee (LEF) or Lenders Mortgage Insurance (LMI). Interest rates may also be higher for loans with a low deposit.
What do banks look for when applying for a mortgage?
Whilst assessing a loan application, banks will scrutinise your bank account (usually the most recent 3 months bank statements).
In particular, they are looking at how well (or not) you manage your account.
Do you have dishonors, and or unauthorised overdrafts?
The better your account conduct the better your chances!
The banks also want to make sure all expenses including fixed and discretionary costs are included in the mortgage application expenses.
How much can I borrow for a first home, rental property or build?
This will be determined by your income, your capacity to repay the loan, and the property type along with the current lending restrictions imposed by the reserve bank. Contact us today to find out.
How much do I need to earn to obtain a loan?
The income you will need to earn will depend on the size of the loan, the bigger your loan the more you will need to earn.
As a rule of thumb if you are a first home buyer who is currently renting and have also been able to save some money there is a good chance you will meet the banks’ income criteria.
What is LIM Report (Land Information Memorandum)
A LIM report is a summary of information that the local Counsel hold on a property. The report covers off information regarding consents, permits, code of compliance, potential erosion, subsidence, flooding of any type and the possible presence of hazardous substances. private and public stormwater and sewerage drain, rates, including any overdue rates.
Your solicitor should review this document.
Can I buy a second home or investment property?
Absolutely, we do this every day for many existing clients. We can use our scenario calculator to ensure you meet lender criteria and affordability for yourself.
I am an overseas resident. Can I borrow money in New Zealand?
Yes, you can borrow money in New Zealand and may be able to borrow up to 80-90% of the purchase price of a home.
Can I withdraw my Kiwisaver?
To be eligible to for the KiwiSaver First Home Withdrawal Scheme you must:
Be purchasing your first home;
- Have been a member of KiwiSaver for a minimum of three years;
- Have your KiwiSaver account with a KiwiSaver provider that allows saving withdrawals; and
- Intend to live in the property for at least six months
- We recommend that you contact your KiwiSaver provider and check their individual policy on withdrawals for first homes.
- If you are eligible to withdraw money from your KiwiSaver, you may also be eligible for a first home deposit subsidy of up to $20,000.00 from Housing New Zealand – known as a HomeStart Grant.
What costs should I expect when buying a home?
Using a mortgage broker generally means no direct costs to you for their services but there are other unavoidable costs. These may include:
- A Registered Valuation ($800 – $1,200)
- Solicitor Costs ($800 – $1,500)
- LIM report ($150 – $400)
- Builder’s Report ($100 – $500)
- Weather Tightness Report for Monoclad houses ($300 – $1,000)
- Finance fee for non-bank lending (~1%)
Prices can vary. Always request a quote before ordering any of these services.
Is getting a mortgage complicated?
The banks all have different policies and risk tolerances. Buyers can get frustrated and waste a lot of time going to banks that won’t suit their needs.
Using a mortgage broker gives you a view of all the banks and their policies. It means you find the right bank faster and with less stress. With a mortgage broker, getting a mortgage isn’t complicated.
It’s about proving you have enough deposit and enough income and then heading to the right bank with that information.
Some tips to making your mortgage application easier: get your documentation sorted early and keep your spending as low as possible in the 3 months leading up to your application.
Do mortgage brokers obtain loans from the banks or lenders that pay them the most?
We will always act in the best interest of the client and will ensure that any deal we broker is the best we can do for the client.
While there can be variances in the amount different lenders pay us we do not favour any particular lender for this reason.
We are also members of NZFSG & Financial Advice New Zealand both of which have ethics that we must adhere to.
We can also be audited at any time by the FMA (Financial Markets Authority)
If the banks pay a commission is this then added on to the cost of our loan?
No… The lenders that use our services see us as an efficient channel to obtain business from. They only pay us on success i.e. when the loan settles.
We sit alongside their other channels such as a bank branch or mobile manager.
The cost of obtaining business from a mortgage broker is comparable to these other channels the banks choose to use.
For this reason, it will cost you no more to use our services.
What if I sell my home or refinance my mortgage shortly after using a mortgage broker?
Mortgage advisers (often called mortgage brokers) are paid by the bank when a mortgage is drawn down. If that mortgage is discharged (repaid and closed) within a short amount of time – typically 27 months – the broker must repay some or all of the commission (often referred to as a clawback). In this instance, the mortgage broker has essentially done the work for no pay.
We reserve the right to charge for our time if a clawback is incurred. The fee will be the estimated amount of hours the mortgage took at an hourly rate of $250 per hour. Unlike other fees, such as Break Fees from the bank, we have capped the amount we can charge clients at $2,500.
If you are refinancing or selling your house, the best thing to do is immediately talk to your adviser and discuss if any clawback fees will be charged.
Should I own the property in my own name, or a Trust or Company?
If the property is for you to live in, this is something you should discuss with your Lawyer at your initial meeting. If it will be an Investment Property, you should discuss with your Accountant. We would also suggest you find a property accountant, someone who deals in property all the time rather than just as a side part of their business.
What is mortgage refinance?
Refinancing creates an entirely new mortgage and an opportunity to restructure in a way that better suits your personal situation.
Why refinance?
People refinance for lots of personal reasons, from changing circumstances to life goals and interest rates.
People often refinance with us because they want to get ahead faster and take advantage of the smart Go Home Loan structure and personalised support we offer.
How will a Go Home Loan save on your Mortgage?
The key to an effective loan structure is putting your savings and income into an account that helps reduce the daily interest costs of your mortgage, not a separate unlinked account.
Why? By combining all your income and savings against your Go Home loan, you’re making your money work harder for you.
My bank already offers an offset account, how is the Go Home Loan different?
A Go Home Loan is a much simpler mortgage structure that still uses your income and savings to reduce your daily interest costs.
How does offsetting work?
Generally, banks offset your money from multiple accounts. Some clients find it difficult to track multiple accounts and figure out how much interest is being charged or offset.
We find that using a Go Home Loan is an effective loan structure by putting your savings and income into an account that helps reduce your daily interest costs.
When do I need to see a Lawyer?
As soon as you have decided to look for a property, the earlier the better. We recommend a good, early, communication plan with your entire team including your Mortgage Broker, Accountant, and Lawyer/Solicitor.