Best way to structure a loan?

[helenc]

hi all, what is the best way to structure a loan in this market?

[Neongreen]

This question has lots to do with your personal situation. If you can't handle much in the way of price increases, it seems logical to fix. Some people also advise breaking your loan up into two or three pieces fixed at different times for diversification. Otherwise, if you think rates are going to drop quickly but could handle a significant price increase too, a floating loan might make sense. Also your period is dependant on what you are comfortable paying. This ranges from 20-30 years typically for a principle and interest loans, and up to five years for an interest only loan.

This leads us to the next kettle of fish - what kind of loan you want. If you want the smallest possible payment, interest only is where you want to be. This has a downside though - you don't build your equity in the property. Also many banks won't so this for a high LVR loan. This is not typically recommended for most people. Finally, we have table loans, which maintain the same payment over the whole period and are the most common, reducing loans, which start high but reduce over time, saving your interest, and revolving or offset loans which let you use your cash assets to save on interest costs.

As you can see, I haven't answered your question - no one here can. You have to figure out what applies to your situation.

[helenc]

thnk u v much for the guidance. yes, I wud like the smallest poss payment, will probably go for interest only.

[Anthonyacat]

On top of the comprehensive advice Neon provided, I'd just like to add that if you leave at least a small portion on floating you can choose to pay this down early if you get some spare cash.

And then there are flexible facilities, such as those offered by ANZ and Westpac (and BNZ?) which allow deposits and redraws, allowing you to save on interest costs by crediting your salary directly and spending what you need. These can be difficult to manage for those without strict discipline, and can have tax implications depending how the whole thing is structured.

[Rosco]

Floating loans generally are at a higher interest rate, so cost more. If you go to www.interest.co.nz you will see that the floating rate is below the 1 year fixed rates. In some cases even the 2 year rate will be less.

If you are with Westpac, then the floating seems to be even more expensive at 6.24%., but there 2 year special is only 5.59%

I like the idea of not putting all your eggs in one basket. So maybe 50% at 1 year to get the best rate, and the other 50% ideally for 5 years, but does depend on the rates available. If interest rates jump up, at least you have some 5 year. If interest rates stay low, then you still have 50% short term.

If it is a personal house, I think interest only is crazy, and would be better to slowly pay down. If you really can't afford a little principal, then you have no choice but interest only, but I think this is quite risky.

For rentals it is technically better to go interest only, and pay off your personal house first. But in reality I like to slowly pay down the principal on rentals too, incase there is not large capital gain. Plus the tax deduction lost by paying of principal is often very small in the first 5 years.

Ross

[Neongreen]

My advice was pretty tongue in cheek; it wasn't advice at all really. It's impossible for us to give helenc any kind of advice I feel because she hasn't given us any information.

That being said, I agree with pretty much everything Rosco said.