When you have a chance you should review your home loan and the first question you should ask is if you have the best home loan.
Yes, that’s questioning if you have the “best” home loan – not just the lowest home loan interest rates.
It’s easy to simply compare interest rates, and that’s what the banks tend to focus on BUT that is mainly because they have very few options when it comes to talking about what’s the best loan.
Plus maybe they do not want to talk about the features of home loans that allow you to pay off your mortgage faster.
If you do pay your mortgage off more quickly then you can save a lot of money, and when you ‘save money’ on your banking it means the bank are earning less. This could be a very real reason that you will rarely hear banks speaking about how you can save money by structuring your home loan correctly.
There Is Too Much Focus On Interest Rates
As mentioned, the banks and media are obsessed with interest rates and they think that everyone wants the lowest interest rate. Of course we all want a competitive interest rate, and for the full term of the mortgage rather than just some ‘special’ deal to entice you to a specific bank.
What we should be looking at is the flexibility that a home loan can offer.
There are a few different options when it comes to home loans and with most Kiwis opting to have most of their lending on the lower fixed rate options, and possibly a small amount on one of the floating rate options that mean having a higher interest rate but having more flexibility.
There are some options when it comes to floating rate loans with the standard term loan, the revolving credit facilities and some banks also offer the offset loans which have become a lot more popular as people understand how they work.
So let’s look at what makes a the best home loan stand out from the ordinary.
Getting The Best Home Fixed Loans
There are two main advantages of a fixed home loan – you get the certainty of a fixed interest rate for a selected period of time, and in New Zealand the fixed interest rates tend to be quite a lot lower than the floating rates offered.
But with the certainty comes inflexibility. You have an interest rate that’s locked in and a set repayment, but it’s hard to change (increase) the repayments which means you’re not going to be able to pay the loans off much faster.
Most banks do offer a bit of flexibility so you can pay a small amount more, but very few offer much flexibility and especially if you have stretched yourself too much and need to reduce the repayments again.
Wouldn’t it be great to:
- Be able to increase your repayments by up to 20%
- Be able to reduce the repayments back to the minimum if needed
- Be able to redraw the extra money that you had paid off your loans
These are the features that make a huge difference.
If you want to pay your home loan off more quickly then you want to be able to increase your repayments by a good amount, but decrease if you find the repayments too much. It’s also good to be able to access the extra money that you have paid off your loans as that is the most efficient way to have emergency funds – where they can be accessed quickly if needed, but where you can save more than you could earn in a savings account.
What About Offset Accounts
As mentioned, these are proving to be popular for those people that know about them BUT most people have never heard about them or never had the benefits explained. One reason for this is that there are only three banks that have offset accounts at the moment and so those that don’t have an offset are not going to be telling you about them.
So what’s so good with an offset account?
Most people have more than one bank account and they all have some money in them, earning little if any interest and then the tax man takes a share. That means while it can be convenient to have multiple accounts it’s not the most efficient way to manage your money. That is if you do not have an offset account.
With an offset account you get to link your offset loan with all of your bank accounts, and then ‘offset’ your money against your loan and so only pay interest on the net amount. You can read more here or speak to one of our advisers who can explain offset accounts in more deatil.
