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  • Personal Circumstance - Mortgage Rates

    Hi all, I decided to make my own thread to get this post a little extra attention as I need replies ASAP as the offer will likely be presented tomorrow.

    I currently have a loan with NZ Home Loans - A revolving credit type mortgage (Originally it was 200k, I've paid off 50k so far (redraw is around 40 something thousand).

    It is split with half on a 2 year fixed rate at 5.49% which comes off 18/03/14 (Just after the next OCR announcement, bugger).
    The other half is floating and I have a .55 percent discount which is good until May 2015 - So it applies, whatever the headline Floating rate is.

    I have been talking with my mortgage man who has given very sage advice over the years, and I trust and respect his opinion.

    He said based on recently approved deals around my mortgage size he could most-likely get me 1 year for 5.39 or 2 years for 6%... and might be able to get me off a break fee.

    Provided the break fee will not apply to my fixed term, is this a worthwhile deal - and would you take 1 or 2 years?

    I'm leaning towards two years because by the time it is up I should have paid off enough of the floating to start attacking the other half.

    Should I keep the other 75k floating, despite knowing that it will go up in March and likely throughout the next year.

    Thoughts and opinions very appreciated!

  • #2
    Hi Fenix

    I'm not sure why you're worried about break fees - Just fix the floating half of your mortgage. Come March, your fixed half expires and becomes your 'new' floating half. You spend in total only 1.5 months with no "floating" mortgage.

    My personal risk profile, I would certainly take 5.39% for 1 year. But anyone a little more risk averse would take the 6% for 2 years rate. It's quite a good one.

    Interest rate predictions are particularly useless right now, but currently many places are thinking the OCR will increase by 1.25% in the next year, and another 0.75% the following. Longer term fixed rates (2years+) are influenced less by the OCR and more by the global swap rate market. Even harder to predict.

    It's all about risk tolerance. I'd certainly think anyone should take one of the rates. Don't have your entire mortgage floating, you'll kick yourself if rates go up faster than expected.
    AAT Accounting Services - Property Specialist - [email protected]
    Fixed price fees and quick knowledgeable service for property investors & traders!

    Comment


    • #3
      Just a couple of weeks ago Westpac offered me better than both rates.

      I think you can get a better deal BUT I would fix a portion at those rates (I'm conservative)

      I would put a chunk on one year.
      Chunk on 2 years.
      The rest on floating.

      Comment


      • #4
        Originally posted by Fenix View Post
        Hi all, I decided to make my own thread to get this post a little extra attention as I need replies ASAP as the offer will likely be presented tomorrow.

        I currently have a loan with NZ Home Loans - A revolving credit type mortgage (Originally it was 200k, I've paid off 50k so far (redraw is around 40 something thousand).

        It is split with half on a 2 year fixed rate at 5.49% which comes off 18/03/14 (Just after the next OCR announcement, bugger).
        The other half is floating and I have a .55 percent discount which is good until May 2015 - So it applies, whatever the headline Floating rate is.

        I have been talking with my mortgage man who has given very sage advice over the years, and I trust and respect his opinion.

        He said based on recently approved deals around my mortgage size he could most-likely get me 1 year for 5.39 or 2 years for 6%... and might be able to get me off a break fee.

        Provided the break fee will not apply to my fixed term, is this a worthwhile deal - and would you take 1 or 2 years?

        I'm leaning towards two years because by the time it is up I should have paid off enough of the floating to start attacking the other half.

        Should I keep the other 75k floating, despite knowing that it will go up in March and likely throughout the next year.

        Thoughts and opinions very appreciated!
        Hi Fenix,

        From interest.co.nz, standard 1 year 5.49% from NZ Home loans. You are hardly getting a bit discount at 5.39%.
        Standard 2 year 6.29%, so getting a bit more here

        In general I would never float much (maybe $30k that you plan to pay off over 12 months), as the interest rate is higher than the 1 year. In your case I'm guessing you are paying 5.3%, and you should be able to get a 1 year rate for less than that.

        Overall, I would look at some longer term loans to spread your risk and not put all your loans at short term. Floating, 1 year and 2 year is all short term.

        Maybe
        - 30k floating
        - 33% or 50% 1 year at low interest rate, closer to 5%
        - 33% maybe 2 or 3 year
        - 33% or 50% 5 years for long term protection, maybe 6.75%?

        If you are really aggressive, you could go all 2 years or less, but what happens if floating rates jump to 10% over next year or two? How would that affect you?

        I fixed for 5 years at under 6% around a year ago, so have at least 40% of my loans for 4 years to go. Obviously the 5 year has gone up, but spreading the loans and having some long term loans reduces your risk!

        Ross
        Book a free chat here
        Ross Barnett - Property Accountant

        Comment


        • #5
          Originally posted by Anthonyacat View Post
          Hi Fenix

          I'm not sure why you're worried about break fees - Just fix the floating half of your mortgage. Come March, your fixed half expires and becomes your 'new' floating half. You spend in total only 1.5 months with no "floating" mortgage.

          My personal risk profile, I would certainly take 5.39% for 1 year. But anyone a little more risk averse would take the 6% for 2 years rate. It's quite a good one.

          Interest rate predictions are particularly useless right now, but currently many places are thinking the OCR will increase by 1.25% in the next year, and another 0.75% the following. Longer term fixed rates (2years+) are influenced less by the OCR and more by the global swap rate market. Even harder to predict.

          It's all about risk tolerance. I'd certainly think anyone should take one of the rates. Don't have your entire mortgage floating, you'll kick yourself if rates go up faster than expected.
          I have tenants so I need some portion floating. My 75k floating is further divided into 2 parts. One where tenants pay into and one where I pay into or take out of.

          Also, I don't know if they would still apply that .55% discount if I did it that way... I'd have to ask.

          I think China's shadow-lending will break down sooner or later (but I don't know what that would mean for mortgage rates), and I also think one day all this money-printing will come home to roost...

          Comment


          • #6
            Originally posted by Rosco View Post
            Hi Fenix,

            From interest.co.nz, standard 1 year 5.49% from NZ Home loans. You are hardly getting a bit discount at 5.39%.
            Standard 2 year 6.29%, so getting a bit more here

            In general I would never float much (maybe $30k that you plan to pay off over 12 months), as the interest rate is higher than the 1 year. In your case I'm guessing you are paying 5.3%, and you should be able to get a 1 year rate for less than that.

            Overall, I would look at some longer term loans to spread your risk and not put all your loans at short term. Floating, 1 year and 2 year is all short term.

            Maybe
            - 30k floating
            - 33% or 50% 1 year at low interest rate, closer to 5%
            - 33% maybe 2 or 3 year
            - 33% or 50% 5 years for long term protection, maybe 6.75%?

            If you are really aggressive, you could go all 2 years or less, but what happens if floating rates jump to 10% over next year or two? How would that affect you?

            I fixed for 5 years at under 6% around a year ago, so have at least 40% of my loans for 4 years to go. Obviously the 5 year has gone up, but spreading the loans and having some long term loans reduces your risk!

            Ross
            I intend to have my loan paid off in 4 years so a 5 year rate hopefully isn't going to do me much good.

            If they come back to me with only 5.39% I will push them harder because all customers with over 20% equity qualify for .1% discount anyway.

            Floating rate of 10% would affect me sure. But if it is 10% in 2 years... I reckon I'd be looking at 10% on 100k, which is 10k a year. Affordable.

            About what would the floating rate be if the OCR is at 3.5 and 4% respectively.

            Regards,
            Levi

            Comment


            • #7
              Hi Levi,

              Your thinking isn't too bad. If you will pay off in 4 years, then your risk of interest rates rising is a lot less.

              I personally can't see floating rates jumping up that much in the next year or two, but 5 years rates have jumped which is an indication that banks think they will!

              With the $75k floating, if you expect to pay close to this off over the year, then it is a reasonable amount. I hate when people who have say $300k floating paying 5.75%, when they could borrow most for 1 year at a lot less. For you, you still should be able to borrow at 1 year rate for less. If you are getting a .55% discount on floating, then you should be able to get a good discount of the 1 year rate. You could put more on 1 year rate, just with high Principal payments each month.

              2 year rate for the rest is probably right for you. You could look at 3 year, but if your loan is getting quite small after 2 then not big $ figures. Slightly more aggressive would be 2 year (I'd go for that), or a more conservative approach, you could go 3 year.

              You are in a great position, so well done. ARe you looking to do something next?

              Ross
              Book a free chat here
              Ross Barnett - Property Accountant

              Comment


              • #8
                Originally posted by Fenix View Post
                One where tenants pay into and one where I pay into or take out of
                Since we are in the Finance and Tax section, thought it best to hone in on this. Are you aware of the tax implications of redrawing from a loan? If any redraws are for personal purposes, that portion of the loan is considered private and non deductible, and that percentage remains non deductible for the life of the loan.

                If your rental and loan are in a company you are probably safe, as you drawing money privately is repaying the company loan to you, making it a repayment of debt and still a business loan.

                Best talk to your accountant to be sure. But they should have raised that with you already. If you're in south auckland I know of a couple I could recommend (including but not limited to the firm I work for).
                AAT Accounting Services - Property Specialist - [email protected]
                Fixed price fees and quick knowledgeable service for property investors & traders!

                Comment


                • #9
                  Originally posted by Anthonyacat View Post
                  Since we are in the Finance and Tax section, thought it best to hone in on this. Are you aware of the tax implications of redrawing from a loan? If any redraws are for personal purposes, that portion of the loan is considered private and non deductible, and that percentage remains non deductible for the life of the loan.

                  If your rental and loan are in a company you are probably safe, as you drawing money privately is repaying the company loan to you, making it a repayment of debt and still a business loan.

                  Best talk to your accountant to be sure. But they should have raised that with you already. If you're in south auckland I know of a couple I could recommend (including but not limited to the firm I work for).
                  Not in that area I'm afraid, but I better get talking to an accountant.

                  For example - If I paid for a home improvement like insulation with a credit card, and I then paid that out of the 1st portion of the floating account it would or would not be tax deductable? Even if I had made personal withdrawels from the account?

                  Does being a resident or non-resident for tax purposes change the game?

                  Regards.

                  Comment


                  • #10
                    Originally posted by Rosco View Post
                    Hi Levi,

                    Your thinking isn't too bad. If you will pay off in 4 years, then your risk of interest rates rising is a lot less.

                    I personally can't see floating rates jumping up that much in the next year or two, but 5 years rates have jumped which is an indication that banks think they will!

                    With the $75k floating, if you expect to pay close to this off over the year, then it is a reasonable amount. I hate when people who have say $300k floating paying 5.75%, when they could borrow most for 1 year at a lot less. For you, you still should be able to borrow at 1 year rate for less. If you are getting a .55% discount on floating, then you should be able to get a good discount of the 1 year rate. You could put more on 1 year rate, just with high Principal payments each month.

                    2 year rate for the rest is probably right for you. You could look at 3 year, but if your loan is getting quite small after 2 then not big $ figures. Slightly more aggressive would be 2 year (I'd go for that), or a more conservative approach, you could go 3 year.

                    You are in a great position, so well done. ARe you looking to do something next?

                    Ross
                    75k would be over two years, at a stretch. I think much more likely is 50k off over two years. But the last 100k going down fairly quickly thereafter. (Though maybe not so much with higher interest rates!) 4 years are my current debtnav calculations based on my budget and
                    current interest rate, however when I change the interest rate to 7% it only takes it out an extra 3 months to March 2018

                    I pondered very hard when we had historic lows about buying but I decided I wanted to not be overburdened and reliant on cashflow when the rates swung up so I concentrated on paying off the one house. Also I wanted to see what the situation was once I'd by and large conquered the one mortgage. Besides, after that's taken care of I think I might just want to quit my job and go sailing... living off the rent

                    Comment


                    • #11
                      Originally posted by Fenix View Post
                      He said based on recently approved deals around my mortgage size he could most-likely get me 1 year for 5.39 or 2 years for 6%... and might be able to get me off a break fee.
                      Have you explored the option of refinancing to another bank??

                      Those interest rates aren't really good... well your loan amount is quite low to attract good rates at the first place.

                      Also if you do refinance with another bank, you should get $2000-3000 cashback/legal contribution, and you probably just need the bank to do an E-Valuer instead of a Registered Valuation.

                      Food for thought.

                      Comment


                      • #12
                        Originally posted by Fenix View Post
                        If I paid for a home improvement like insulation with a credit card, and I then paid that out of the 1st portion of the floating account it would or would not be tax deductable? Even if I had made personal withdrawels from the account?

                        Does being a resident or non-resident for tax purposes change the game?

                        Regards.
                        I'm no expert on residency, very rarely deal with anything outside NZ. But I don't beleive residency status would affect this particular part of the tax law.

                        If your drawdowns from a loan can be directly attributed to increasing your assessable income (rents) it is deductible. Doesn't matter if it first goes on your personal credit card and then comes out of your mortgage, etc. In the case of insulation and other repairs or improvements, you would be safe (so long as you only drew out of your mortgage the amount to pay the insulation, not to pay the whole credit card including personal stuff!) as you are only repairing or improving to keep tenants interested in living there.

                        As a brief example of what is NOT ok...

                        Initial loan for rental: $400,000. 100% of interest is deductible.
                        After a year, you have paid off $50k of debt, but you have a revolving credit (or similar) loan that allows you to pull that money back out if you like.
                        You withdraw $20,000 to renovate the kitchen and $30,000 to buy a new car, bringing the total loan back to $400,000.

                        Of that $400k, $30k (7.5%) is private and non-deductible. For the rest of the lifetime of the loan! You have to pay down the private and business portions in equal proportions.


                        The situation gets worse for people who use their revolving credit facility as their everyday account. Wages go in, and the loan is partially repaid. Weekly expenses come out, and more and more of the loan becomes personal.
                        AAT Accounting Services - Property Specialist - [email protected]
                        Fixed price fees and quick knowledgeable service for property investors & traders!

                        Comment

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