A fixed rate mortgage gives you the certainty of knowing exactly what your repayments will be for a period of time. In New Zealand you are able to fix your mortgage rate from 6 months to 5 years with most banks.
Taking a fixed rate mortgage does restrict a portion of your loan amount, banks generally charge a fee if you repay your fixed rate mortgage during the chosen fixed term. So if you are planning to sell your house or expect to pay off large chunks of your mortgage, a fixed term may not be the best way of structuring your entire mortgage amount.
Some banks do allow some additional payments to be made in any one year, amount vary from 5% of the total amount to a 20% increase in the loan repayments. How much should you fix?
A floating rate mortgage enables you to pay off large chunks anytime. The rate can move however which means that you should budget for any increases in repayments.
Some banks allow you withdraw any extra payments you have made at a later date, this may incur a fee or be restricted to a minimum drawdown.
A revolving credit mortgage is similar to a floating rate mortgage in that it allows any extra payment to be made and the interest rate can change from time to time. The difference is that with a revolving credit mortgage you are able to withdraw any additional payments over and above the minimum amount at any point. To enable redraws, these accounts come with all facilities similar to a cheque account, ie internet withdrawals, auto payments, eftpos.
As all banks in New Zealand calculate the interest payable on your mortgage on the daily balance, this type of account can help you to minimize the interest cost by using any credit balance’s. Plus since you know you can withdraw additional payments at any time you may feel more motivated to make larger payments towards your mortgage.
An interest Only mortgages is an option on any of the types of loans above. An interest only mortgage gives you the ability to make interest payments only. This can lower the regular commitment from your cash flow but of course the amount you owe remains the same. This can be an expensive option in the long run, it pays to talk to the a professional mortgage broker about the true cost of this type of option.
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