What You Ought to Know
A little while ago we were talking with the owner of a small but growing landscape business and a home, a smart guy who understands business. He’s saving for another house to rent out. He also said he’d never thought about his mortgage because he was afraid he wouldn’t understand the ‘lingo they talk’ when dealing with the bank. Since we help people with mortgages you can imagine this was something of a shock… made us think how many other people would like to understand the banking terms better.
The mortgage business does use a lot of specialised words but there really isn’t anything especially complicated or mysterious about what these mean. Because we’ve used them so long and so frequently we’ve just assumed everybody understood them. That has been our mistake. And a big mistake. For if people don’t understand what mortgage terms are, they aren’t likely to spend their time considering their options. “So what?” you ask. Well, here’s “what”.
A lot of people might want to invest some of their savings where they can get a fair return on them, for many New Zealanders this has been in property. But they are unfamiliar where to start or what their appetite for risk and rewards are. If you want to consider home loan options but you’re unfamiliar with the terminology, it’s unlikely you will put your money into them, and miss out on the benefits. For all these reasons and more, it’s important that people know as much as they can about this mortgage business.
You can skip over the stuff you already know.
What is the difference between fixed and floating terms?
Fixed terms bring certainty to your mortgage repayments over the agreed period (for example 4.69% fixed for 2 years). In NZ it’s common to fix for 1-3yrs at a good interest rate (what on the day is perceived to be good). Banks like to have a mixture of fixed and floating loans on their books to manage their own risks to the global markets and this is one of the reasons the rates fluctuate. Banks try and keep both the fixed and floating rates somewhat competitive and let the consumer decide.
It’s more traditional in New Zealand for people to fix for short to medium terms and assess the rates every few years. Floating terms allow you to ride the interest rates up and down, this is linked to the Official Cash Rate (OCR). Your repayments will go up and down each month but you’ll be able to fix when you think there’s a good interest rate.
Should you fix, refix, refinance, or float…?
This really depends on the type of homeowner or property investor you are. When the rates are low and falling you’ll want to fix at a good rate before they start going up again. All global markets go up and down in cycles that are very hard to predict, even the experts struggle, so it’s best to get advice from an expert you trust.
What is re-fixing?
When you’ve got a mortgage on a fixed rate you can re-fix with the same bank at a different interest rate but there’s usually a penalty for this. The reason you’d consider this is because the savings from the lower interest rate would be lower than the cost of the break fee(s).
What is the difference between re-fixing and refinancing?
Re-fixing your mortgage refers to a new loan with the same bank you’re already with. Refinancing is when you change banks to take advantage of lower rates. Whilst it’s easier to stay with your current bank, it can be more better to refinance your mortgage with a different bank who will offer more attractive interest rates or offer you cash back to incentivise you to switch. Most banks have dedicated teams to help people switch banks and all automatic payments are seamlessly brought over. One of the reasons banks do this is because of their monthly targets. Your current bank might not be able to match the attractive rates and rewards being offered by other banks.
Use our refinance calculator to see how much you could save with a lower interest rate.
What are ‘break costs’?
Break costs are the penalty for cancelling your mortgage. The bank will try and discourage you from changing to a lower rate or switching banks by charging you a fee. Usually the only reason you’d pay this fee is because the benefits are bigger than the fees. If you’re switching banks the new bank might help you pay these fees with cash back. You can also add the break fees to your mortgage with the lower interest rate and pay this off over the life of your mortgage. In the long run it is often a small price to pay for the benefits of re-fixing or refinancing. Some people do get a little worried when the break fees are big fees in the $5-10,000+ range but when they see that they are saving much more than that they can see it is worth it.
Use our break fee calculator to get an estimate of your break costs.
Should I float or fix or both?
That’s a tough question and without too much more information it’s best to leave it with this: if you have an average mortgage and can make the repayments consistently each month, you’re probably fine with either option. If money is tight you’re best to fix now while rates are low and work out your costs going forward with a plan in place. Again, it’s best to get an expert to look over everything and like you would with medical questions, a second and third opinion can’t hurt… especially when they’re free.