Darren Pratley

Darren Pratley - Director
The Home Loan Group (NZ) Ltd

Loan Type & Interest Rate Options

Interest rates fall into four basic types:

Revolving Credit

A set credit or loan limit that allows borrower to repay and then redraw funds at any time with no penalty. Interest rate is based off floating interest rate.

Floating or Variable Rates

This rate fluctuates depending on the wholesale market interest rate. The advantage of a floating rate is that if rates reduce, repayment reduce but if interest rates increase, so likewise does the repayment amount. Because the lender is always receiving a market return on their money they allow maximum flexibility for such things as lump sum reductions of the loan debt.

Fixed Rates

As the name suggests, a fixed rate is locked in for a specific period of time irrespective of changes in the market floating rate. Fixed rates can be cost effective, provide repayment certainty in the early stages of the loan term and make budgeting easier.

Capped Rates

A capped rate is the maximum interest rate you will pay but if the floating rate falls below the capped rate, your loan repayments will reduce accordingly. You receive the benefit of interest rate reductions but are insulated from increases in interest rate above the capped rate. Not all lenders offer this option to borrowers.

Revolving Credit Facilities

What is a revolving credit facility?

A revolving credit facility is a permanent lending limit set at a maximum of 90% (depending on the lender) of the value of your home or other property, and able to be used at any time, for any purpose. You are able to access funds by cheque and ATM card and only the interest cost needs to be met each month. You can even split your loan debt between floating and fixed interest rates and revolving credit.

This can be useful for:

Aggressive Debt Reduction:

Most people as a matter of necessity regard their home loan as a long-term debt, perhaps spanning as many as 25 years. However, there has been increasing publicity in recent times about "magic" solutions designed to reduce your loan term and save thousands in interest. Often businesses touting these miracle solutions charge between $1000 and $3500 to let you in on the secret! However, we increasingly hear stories of clients being matched with inappropriate financial solutions, with little thought by the Broker (or the inexperienced commission salesperson) as to the implications downstream.

Basically, the philosophy involves turning conventional debt reduction wisdom on its head. Rather than setting a fixed level of loan repayment and consuming most or all residual income on "living", all income is paid into your home loan. This has the immediate and dramatic effect of reducing your loan balance (albeit temporarily) and consequently, the interest charged.

By using the 'up to 55 days free credit' available on your credit card to pay as many expenses each month as possible and paying the card balance in full each month with a withdrawal from your mortgage account, the effects are maximized; you incur no credit card interest (useful, when the rate of interest approaches 20%) and your loan balance remains reduced for the maximum possible time period.

Points to consider:

  • This approach requires ongoing commitment to aggressive debt reduction.
  • Maximum benefits are realized only if you are in receipt of an income which includes a significant discretionary component.
  • Be prepared to sit down and accurately assess your income and expenditure for maximum benefit.

There are 4 key individual elements to maximizing the benefit of a revolving credit facility:

  1. Deposit all income directly into your home loan. This means salary or wages, commission, rental income and bonuses. This increases efficiency by reducing the loan balance on which interest is calculated by the lender.
  2. Defer expenses wherever possible. This can be achieved by paying as many day to day and periodic expenses as possible, using a credit card. (If you choose to pay by cheque only pay on or near the due date). This leaves more of your income sitting directly against your home loan. Be sure to pay the credit card debt in full each month to avoid incurring interest.
  3. Keep track of your spending by budgeting effectively. If you track your spending you can recognize opportunities to save money.
  4. Take advantage of competitive fixed interest rates for a potion of your home loan. This allows you to budget around a fixed cost for the bulk of your debt and focus on realistic debt reduction of the part of your loan which is on a revolving credit facility.

Ready Access to Additional Credit:

This is a good way to pay for that rental property, new car, holiday or home improvements (or indeed, any expenditure item). Access to funds is immediate (just write out a cheque or use your ATM card) and no application fee is payable or paperwork to be signed.

Points to consider:

A certain level of financial acumen and responsibility is essential in order to ensure there is no escalating debt and an increasing inability to manage your finances.

In summary:

Be aware of charges and bank fees that some lenders charge for each transaction or for the unused portion of your facility. Our Consultants can advise which product may suit your needs and the relevant cost.

We do not charge our clients a fee for setting up a revolving credit facility; (normal bank charges apply) but if you wish us to undertake an in-depth budget analysis and loan repayment forecast, we do charge because of the time commitment involved. (This could even be done annually) This is a decidedly modest charge but worthwhile.