Types of loans commonly available in NZ
You can ‘fix’ your loan for a set period of time, (1yr, 2yrs, 3yrs and 5yrs are common). There are advantages and disadvantages.
Advantages: You know exactly how much each repayment will be over the period you fix for. Rates are generally lower than floating rates, as lenders compete with fixed rate “specials”. A one percentage point difference in interest rates can save you thousands of dollars over just a year or two. Your rate will not increase , even if the market rates are increasing.
Disadvantages: Fixed rates often have limits on how much you can increase regular instalments or make lump sum payments without paying charges. If you take a fixed rate long term, there is a risk future interest rates may fall below your fixed rate. Capped rates are a variation where the interest rate cannot rise, but will fall if floating rates drop below the capped rate. Capped rates are usually priced higher than fixed rates but below floating rates.
Floating rate (also called variable rate)
Lenders will raise or lower the interest rate on floating rate loans as interest rates in the wider market change. Change in the OCR (Official Cash Rate) will generally dictate the raising or lowering of interest rates on variable rate loans and this is driven by the Governor of the Reserve Bank. This means your repayments may go up or down. For the latest rates contact a broker at Oliver Mortgage Services.
Advantages: You can increase your repayments or make lump sum repayments without penalties.
Disadvantages: Floating rates have often been higher than fixed rates. When rates go up, the repayments also go up. This can impact on your budget.
Combination (Split Loan Facility)
You can have the best of both worlds. How you split the loan is crucial , so you should discuss this option with your Oliver Mortgage Services Broker.
Reverse Annuity Mortgages
A Home Equity Release (or Reverse Annuity Mortgage as they are sometimes called) product is available to New Zealand Seniors, and may provide a way to help fund your retirement.
What is a ‘Lifetime Loan’?
A Lifetime Loan is available to Seniors, aged over 60 years, who are homeowners. A percentage of the equity in the home is released as a cash lump-sum, with no repayments required until the end of the loan. Between 15-45% of the value of the property can be borrowed, dependent on age, and the loan remains in place until you move from the home, enter long-term care, or pass away.
Why would you choose a ‘Lifetime Loan’?
It can help to make life in retirement a lot more fun. The most common reasons for taking out a Lifetime Loan include:- taking an overseas holiday; buying a new car; home improvements; medical treatment, or simple day to day expenses
This enables retirees to continue to live in the manner they have been accustomed to during their working life. The Lifetime Loan can even be used to pay off an existing mortgage, avoiding monthly repayments that can be a struggle on a low, fixed income.
There may also be notable emotional benefits. Homeowners are able to ‘age-in-place’, allowing you to remain in a familiar environment and neighbourhood, where there may be emotional ties, and significant support structures. You also avoid the stress of selling and searching for a new home, and the associated costs.
Whether this could be an option for you or a member of your family, the decision to take out a Lifetime Loan should be discussed with your Oliver Mortgage Services broker and a solicitor.
Ways of making repayments
Allows for paying the home loan off steadily over a period of time. Each instalment pays a portion of the principal as well as the interest on the loan. The interest is calculated on the outstanding prinicpal balance at the time of each instalment. With table mortgages the instalment amount remains the same. The interest portion of the instalment gradually reduces and the princiapl portion increases by the identical amount.
Advantages: Provides for regular payments and a set date when the loan will be paid off. Provids certainty of what the instalments will be.
Disadvantages: Minimal reduction in the principal amount during the early years of the loan.
Revolving credit loan
All your income goes into a single account. This account has all the characteristics of a cheque account. You then use this account for all of your expenses and for repaying your loan. Surplus funds can help reduce the loan more quickly. By keeping the loan as low as you can at any time, you pay less interest because lenders calculate interest daily.
Advantages: You can pay off the mortgage faster. An option for people with irregular incomes as there are no fixed repayments. Putting surplus funds into this account rather than a separate savings account will give greater interest savings and pay the loan off quicker.
Disadvantages: You need discipline! It can be very tempting to spend up to your credit limit and stay in debt longer.
You pay only the interest on the loan until the period decided by you and the bank. Some borrowers take an interest-only loan for a year or two and then switch to a standard loan.
Advantages: You have more cash for other purposes, such as renovations. This facility is popular for property investors and provides distinct taxation benefits as all of the interest is tax deductible whereas the principal portion of the mortgage repayments is not.
Disadvantages: You still owe the full loan amount at the end of the term.