Which mortgage structure will work for you?

Choosing the right mortgage structure is always tricky. But with interest rates high, a well-tailored home loan is the best way to save money. Whether you want the certainty of locking down your repayments or the flexibility of paying lump sums, there’s an option to suit. We sat down with Aseem Agawal, Head of Mortgages at Global Finance, to discuss how each mortgage structure could work in 2023.

Splitting your loan between different fixed terms

As you would diversify your investment portfolio, splitting your home loan between different fixed terms can make you less vulnerable to market changes. If interest rates go up, you only get hit on one portion of your home loan. If interest rates go down, you can take advantage by refixing the portion of your loan that’s up for renewal first.

Aseem notes that calculating your savings is the only difficulty with this mortgage structure.

“Tracking each loan is more complex than tracking one fixed loan. For example, if you split a loan of $500K in half, you have to check how much one loan has gone down each month and compare it to the other to see real savings.”

A fixed and floating/revolving hybrid

Fixing a large portion of your mortgage and leaving the rest floating or revolving is a great option for anyone in the habit of saving. Every month, you can put part of your income into your revolving credit account and pay down your loan faster.

This structure is particularly good for people expecting a cash injection, bonus or pay rise. By paying lump sums into your credit account, you can offset them against the loan and pay less interest. It also means you can access that cash if you ever need it again. That’s why even though this structure can see significant savings on interest long-term, Aseem says it requires careful budgeting to work.

“You need to actively manage your finances to ensure you pay down the floating or revolving portion quickly – and not spend it! If you leave it as a debt for too long, you risk your entire investment.

“For self-employed borrowers, whose income can fluctuate monthly, it may not be the best option.”

Is revolving credit right for you? Find out more here.

Fixing your entire home loan

Fixing your entire mortgage gives you certainty around monthly repayments for up to five years. With historically low interest rates over the past five years, the majority of New Zealanders fixed their entire home loan to lock in those low rates. But with so much volatility in the market right now, Aseem says this approach could lead to a bit of pain for those people.

“When your loan comes up for renewal, you’ll be hit on the entire amount — good or bad. It’s worth remembering that Kiwis who fixed their entire loan three years ago at 4% will be jumping as high as 7% this year. Would you be able to afford such a drastic hike?”

Suit yourself

There will never be a one-size-fits-all mortgage structure. It depends on your finances, future goals, interest rate predictions, risk tolerance and bank criteria. The best way to decide is to sit down with a mortgage broker and go over your options. The team at Global Finance are experts at helping clients in the current economic climate. We work hard to ensure you don’t pay more interest than you need to.

Want to save interest on your home loan? Call Global Finance today.

The information and articles published on this website are true and accurate to the best of the Global Finance Services Ltd knowledge. The information given in articles on this website should not be substituted for financial advice. Financial advice should always be sought. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or their employees liable.