Upgrade your home, upgrade your home loan

media release

20 April 2012

EMBARGOED until 1am 20 April 2012

Upgrade your home, upgrade your home loan

CANSTAR releases home loan star ratings results today.

Confidence is returning to the home loan market as the period of low interest rates looks set to continue and more prospective buyers are weighing up their real estate options.

The extra activity in the residential property market signals the perfect time for new, as well as existing borrowers to carefully check their home loan to ensure it has the flexibility to meet their needs in a changeable financial environment.

According to financial research and ratings company CANSTAR, consumers should make it their business to know exactly what they are signing up for and, if necessary, upgrade their home loan to something more suitable.

Almost half of new mortgages are on floating rates and even more are expected to switch when their current fixed periods expire. Yet, just a few years ago, most home owners wouldn’t dream of doing anything other than fix.

“Floating rate loans can be beneficial in a low-rate environment because they can save you money in two ways,” CANSTAR National Manager Derek Bonnar said.

“Your monthly repayment is less, leading to instant financial relief or you can choose to continue paying the higher repayments to shorten the life of your loan. Either way, you’re ahead of the game.”

CANSTAR today released its annual home loan star ratings report whch compares and rates 153 home loans from 15 lenders.

Loans include fixed, floating and line-of-credit loans for residential and investment purposes, the most outstanding of which are awarded five stars for the overall value they offer to consumers. The report is useful for those looking to make a shopping list of loans to follow up on, or even just to see how their current lender stacks up.

“Many borrowers are dazzled by features such as revolving credit which can be a bonus if used correctly but this loan can just as easily become a never-ending debt for the undisciplined,” Mr Bonnar said.

Saving money on your home loan should be the priority for all borrowers.

CANSTAR has put together 7 tips to help you save big bucks on the roof over your head.

Here’s how to do it:

1. Make extra payments. The bulk of monthly mortgage payments are interest on capital. Reducing the capital owed results in lower interest payments. One way to approach this is to pay bonuses, tax refunds, or any other unexpected windfall, into the mortgage. Even if it’s a few hundred dollars at a time it will reduce the interest payments over the life of the mortgage.

2. Pay fortnightly. There are 12 months in a year, but 52 weeks. If a home owner pays half of the monthly mortgage payment fortnightly, that equals the equivalent of one month extra each year. This is an easy way to pay more.

3. Increase your payments. Paying more each month into a mortgage sounds painful. Yet the home owner gets 100% of the benefit. Consider dedicating pay rises to your mortgage. The more you pay, the quicker you clear the mortgage.

4. Reduce the term. Most people sign up for 25 year mortgages. Yet by paying over a shorter period, the interest component is reduced. That's because larger monthly payments whittle away at the capital at a faster rate – providing it’s a capital and interest mortgage.

5. Get a reducing mortgage. Reducing mortgages are similar to table mortgages, which most people on capital interest are paying. With a table mortgage the initial monthly payments are mostly interest with a small amount of capital. As the capital is paid off, the interest portion drops and the capital repayment goes up. With a reducing mortgage home owners pay an equal amount of capital each month, which means the capital is paid off faster. The initial repayments, however, are higher than a table mortgage.

6. Change lenders. It can save money to shop around for a better interest rate or change to a different product with the same lender. It’s worth speaking to the existing lender first in case there is a better deal and to ascertain if there are any break or discharge fees. It’s important also to factor in any legal fees and establishment fees to set up a new mortgage.

7. Ask your existing lender for a discount. If you can’t justify the cost of switching to a new lender but you can find a better rate in the market, don’t be afraid to ask for a better deal from your existing lender.

The moral of this story is to get all the details of your existing home loan from your existing lender. Look for all of the options on offer and consider how they fit with your financial situation. If you can afford a reducing mortgage, or a 20 year term, then do it.

The full home loan star ratings report from CANSTAR can be downloaded on www.canstar.co.nz

ENDS

nzhomeloansapr2012.pdf

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