STRUCTURE OF LENDING

8 March 2017
With markets stabilising and the Reserve Bank indicating they won’t be lifting interest rates any time soon it is a good time to look at what the recommendations are for structuring mortgage lending.
 
FLOATING/VARIABLE:  The floating rate offers the flexibility to pay off your loan without any restrictions.  However the floating rate is currently amongst the highest rate and offers the least amount of security.  
 
REVOLVING CREDIT:  This is your mortgage, transaction and savings all in one and provides the maximum amount of flexibility with you being able to deposit funds and withdraw them whenever and however you like.  It is theoretically the quickest way to pay off your home loan. However studies show that only 15% of the population can use this product to it’s potential.  It is a floating rate so again the highest interest rate out there.
 
OFFSET:  This is a floating home loan and has the advantage of the Revolving credit in reducing your overall lending costs but the advantage of being able to keep your mortgage separate from your transaction and savings accounts.  It can be linked to other accounts meaning you could have many different accounts for different purposes. 
 
FIXED 1 YEAR:  Some economists are recommending the 1 year fixed rate as it is markedly lower than the variable rate and they anticipate rates will remain low for the next 2 years so offers some flexibility in being able to pay lump sums off the loan or increase payments after that year is up.  However if they are wrong and interest rates move earlier than anticipated clients could be penalised.
 
FIXED 2 YEAR:  This term offers medium term security and ties in with Economists’ recommendation based on interest rates not expected to move for the next 2 years.  However if they are wrong a client fixing for 2 years now could come off their fixed term and be hit with markedly higher interest rates
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FIXED 3 – 5 YEARS:  These longer terms provide maximum security but the least flexibility.  While they are also higher than the short term fixed rates, given that the average interest rate since the introduction of the OCR in the 1980s has been around 8%, the advertised rates being under 6% are still very attractive.
 
MIXTURE:  often a mixture of loans is the most suitable for clients.  Eg you may wish to have the flexibility and benefit of an Offset plus the security and benefit of a fixed rate.  Some people will even have some lending fixed short term and some fixed longer term to maximise the advantages of all types of loan on offer
It is important that clients have individually tailored structures to reflect their financial personality, their current situation, and what their future plans are.  The recommendation should be based on an assessment by your mortgage advisor who is up to date with current markets and recommendations and how it can best benefit you, the client.  
 

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John White - who has written 90 posts

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