Mortgage Structure – rates are just the beginning

#1 of a 3 part series about mortgage structures and how to restructure your mortgage.

Mortgages can seem complex but with the right advice, they can be made simple to understand. There are two options you can consider:

  1. Reduce repayments: to boost personal cashflow in the short term.
  2. Increase repayments: to reduce mortgage costs over the long term.

Focusing on cash flow (reducing repayments)

The lowest amount you can reduce your repayments to is ‘interest-only’ where you are not repaying any of the mortgage – just making payments on the interest that is charged each fortnight. If you have a $500,000 mortgage and pay interest-only, in 5 years’ time your mortgage will still be $500,000. 

This can be very useful for a short period of time if you are in a tight spot moneywise and is often used temporarily whilst renovating or building. This is usually reserved for investment property only.

Saving money long term (increasing repayments)

To save money you would pay off the mortgage as quickly as possible. You can do this by decreasing the term of your mortgage – if you change your mortgage from a 30 year to a 20 year the payments will increase but you will pay off your mortgage 10 years earlier.

In addition to these two strategies, there are other methods that might work for you and have great results. 

  1. Get better interest rates. If you lock in lower interest rates your mortgage expense will instantly decrease. At iRefi.co.nz we see hundreds of deals flowing through so we know if you are getting a good offer considering your situation – talk to a mortgage adviser to see if you are getting a good deal. 
  2. Interest rate averaging. Interest rates go up and down, you can choose to opt for a ‘floating rate’ or you can lock an interest rate for 1-5 years. Most investors break their mortgage into several chunks, for example, splitting their $500,000 into 3-4 parts of $125,000 then putting one on a 1 year term, one part on a 2-year term, and one part on a 3-year term – this helps you get good rates without any huge surprises. 

Revolving credit/Offset. Revolving credit or offset is set up to allow you to repay it all at once or to withdraw all the lending again. This lets you pay off your mortgage one day and withdraw it the next without ever having to talk to a banker. This ensures you can put extra money into your mortgage saving you interest but keeps your flexibility to draw it down again to buy a new property, renovate, travel or fill your bathtub with cash. Because you often have ‘cash’ sitting in the offset account it also reduces your interest repayments.

Is it smart to pay off your mortgage?

One of the biggest misunderstandings about debt is that paying it off faster means financial freedom sooner. There are bad debts like credit cards which should be paid off.

There is good debt that when well researched will help you build to financial freedom. Home loans from banks at the low mortgage rates enable many people to buy a property and invest in assets that hopefully go up in value over time and produce cash flow to fund more investments. Instead of paying down your mortgage you can keep maximising it to buy more properties and build a portfolio. This is where revolving credits and offset accounts can be hugely beneficial.

Make your mortgage work for you

Assess your situation, are you needing to focus on short term cashflow or can you afford to increase repayments and focus on reducing interest costs over the long term? Take the mortgage snapshot to get information about what options are available for you or give us a call on 0800 733 462 to have a chat around restructuring your mortgage to help you achieve your goals in 2020.

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Timmy Brown

About the author

mortgagehq is a mortgage advisory firm helping property investors and first home buyers secure the best finance options. Their mortgage advice will help you understand mortgage structures, products and tactics to help you achieve your financial goals.