Loan Types

The interest rate of this loan changes on a daily basis. The floating rate interest will increase or decrease in line with the market. The loan is traditionally paid as interest and principal. It is also possible to pay interest only for some time at the absolute discretion of the lender.

Advantages of a floating rate loan:

Flexibility:

Whilst you will always have to meet your agreed minimum monthly repayment rate, you will also have the option to repay lump sum amounts of the loan without incurring any penalities. What this means is that in the event you were to receive a salary raise or a company bonus for example, you can elect to pay a higher rate in order to reduce your loan term quickly and therefore pay less overall interest.

Possibility of lower rates:

If the market were to dip and interest rates go down, this would result in your interest rates going down. This has the added benefit of even if interest rates were to drop, you could pay the same monthly amount in order to maintain the time it takes to pay off your loan.

Not locked in:

Circumstances can change at any time. If there was a need to sell your house, refinance your loan or switch to a more attractive rate with another bank, there is the freedom to do so. Floating rate loans tend to have no break fee, which otherwise can be quite costly.

Consolidating other debt:

Able to use your floating home loan to consolidate other debts that you may accrue over time. This is often considered an attractive option as floating home loans usually have a lower rate than personal loans.

Disadvantages of a floating rate loan:

Less consistency:

The interest rate is dependent on market conditions therefore interest rates may vary each month leading to both higher and lower repayments. This can be tricky for those that are on a tight budget or have trouble correctly managing their money.

A slightly higher rate:

Currently, in New Zealand, floating rates tend to be slightly higher than fixed loan rates.

In a nutshell, this is considered to be a big overdraft facility. One can reduce the loan amount by paying off the principal. One can redraw this amount quite easily by using the amount when required. Your mortgage is treated like your everyday bank account as your salary gets put into the account and bills are paid from this account when due. Interest is calculated on a daily basis thus it is important to try to keep the loan as low as possible. Some revolving credit mortgages gradually reduce the credit limit to help you pay off the mortgage.

Advantages of a revolving credit facility:

Convenience:

Draw down, repay and redraw funds at any time within your credit limit. Suitable for those with uneven income and those that are good at managing their finances as there are no fixed repayments.

Additional saving:

Putting surplus funds into this account rather than a separate savings account will give bigger interest savings and also avoids the tax on the savings account interest.

Disadvantages of a revolving credit facility:

Bank fees:

As these are also transaction accounts, the usual bank fees can apply for things like deposits, withdrawals and setting up an automatic payment.

Good self-control required:

If you keep borrowing up to your credit limit, you’ll end up paying interest on the full loan amount year after year thus good control of finances is paramount.

This is a great way of reducing your interest you pay to the bank. In most cases, the financial institutions off set about 10 savings accounts at one time and these usually include personal, joint borrower’s, parents’ or children’s accounts. The balance in these accounts is used to offset the amount of interest (which is calculated daily) you pay on your offset loan.

Advantages of a offset facility:

Save on interest:

If you regularly have money in transaction or savings account you can save on interest and pay off your home loan faster, and if you are fully offset you can pay no interest. Additionally, the offset account can be offset with different entities. For example, a self-employed person who may have some savings under their business account can offset their savings against this account thereby reducing the total cost of interest payable to the bank.

Control over your monthly mortgage cost:

While the principal repayment stays the same, the interest component will fall if you add more to your savings accounts.

Disadvantages of a offset facility:

No credit interest:

The linked savings accounts do not earn any interest when they offset a loan. Caution for adviser(s) is to make sure that it is very clearly explained to the clients and make sure that the clients are aware of which accounts they have to sacrifice their savings interest. Not a very popular account in NZ.

Monthly fees may be applicable:

Certain banks charge ongoing fees for having an offset mortgage, which is debited from your current account.

Some financial institutions offer loyalty air points for their loans. Not a popular home loan currently. The financial institutions may charge a higher rate of interest and also financial institutions impose certain restrictions for these types of loan. This loyalty type of loan can be applied for both floating and fixed rate of loans. Only a few financial institutions offer this type of loans.

Advantages of a air points loan:

Flexibility:

Choice of fixed, floating, or split home loan option and a choice of table, reducing or interest only repayment structure.

Disadvantages of a air points loan:

Limited financial institution options:

As this is not a popular home loan as of present, only a few financial institutions offer this type of loan thereby limiting options.