What’s your largest regular expense? It’s almost certainly your mortgage payments.
For the average Kiwi homeowner, your home is your biggest investment and your loans are your most significant expense. Yet many people don’t give their home loans much thought. The majority of borrowers stick with the same bank, often at their cost, and never take a good hard look at how their loans are structured.
Don’t rush into a decision
When a fixed loan term is about to expire, your bank will call you with the aim of getting you to sign up to a new fixed term. They may offer the advertised rate and warn you that the rate could soon go up. They may offer you a discount on that rate, especially if you ask, and they’ll usually tell you that the discount is only available for a short time. It’s tempting to just say yes because it’s the easiest course of action. And you might be getting a good deal – but you don’t know without shopping around, and the cost of floating your loans for a month to find out is well worth it.
“Shop around,” says Michael Cave, director of Cave Financial. “Rates are incredibly low right now, plus you can get improved conditions and cash back. We find out what all the banks are offering, including the incumbent bank, because some of our clients love their existing lender. But just because they’ve ‘been good to you’, doesn’t mean you should let them rush you into a quick decision over the phone by saying a rate won’t last. Take your time and do your research, or use a broker to do the work for you.”
Do the numbers on break fees
Recently Cave crunched the numbers on breaking a fixed term for a client who had only 10 weeks to go, and found that it would cost around $350. After five weeks on the new fixed term she’d have paid that money off, saving herself several hundred dollars by switching early.
“The break cost is basically whatever the bank needs to recover its losses, so sometimes it’s neutral, but sometimes it can pay off – and finding out costs nothing.”
Watch out for the one bank trap
If you own more than three rental properties and your loans are all with a single bank, you may find yourself paying a premium on your lending. At some point when you own several rentals, your account will move from your bank’s residential lending team across to a commercial or investment lending team. The rates will usually be a bit higher and that team won’t typically be able to offer the same incentives or cash backs.
“Being with one bank may be fine, depending on what they’re offering,” says Cave. “Sometimes we can negotiate with your existing bank to keep your rates down. Often, though, if a client had six investment properties I would advise them to split their lending across two different banks. If you use a broker it’s only one application, so it’s not a lot more complicated, but there are benefits to having a relationship with two banks, particularly when times are tough.”
Think about restructuring
Getting the structure right on your home loan can help you pay it off faster without necessarily increasing your repayments. While making higher repayments is always a great strategy and will reduce your debt faster, careful structuring can also help. Revolving credit and offset loans can help you to reduce the amount of interest you pay, provided you use them responsibly.
“A sharp interest rate is important but it’s just the beginning,” Cave says. “It’s also about how you structure the loan to help you pay it off more quickly. You want that home mortgage paid off before you retire, or even better still, 10 or five years before that. Then you can put those loan repayments into creating more wealth.”
Be prepared for the inquisition
In today’s economy, hot rates and chunks of cash are the upsides. The downside is the level of scrutiny for borrowers. Brace yourself for the bank to closely question you on your individual properties and your personal spending.
“One of my clients is a minister and the bank even wanted to see a donation certificate of what he was giving to his own church!” laughs Cave. “The banks are being diligent, which is good, but you need to be ready for some unexpected questions.”
For Impression’s property management clients, a free one-hour session each year with an Authorised Financial Advisor at Cave Financial is part of your package. If you’d like to know more, or book your session, get in touch.