Understanding Mortgage Rates; It’s Not Rocket Science


Make sure you know the basics about mortgages to make a smarter choice. While it’s complex, it’s important to understand—and it’s not rocket science.

Opting for a mortgage is a big decision and one that should be taken after weighing all the pros and cons. The key focus should not just be on what your monthly liability is going to be, but what interest rates you will be paying. These rates are sometimes subject to change and you need to understand what to be prepared for financially, and how your repayments will work in such cases.

Understanding mortgage rates

Fixed rates of interest: This is an option where the rate of interest is fixed at the beginning of your mortgage period and stays that way no matter the fluctuations in the market. These are usually fixed for two or five year periods. At the end of the time frame you choose, your mortgage is moved to a standard variable rate (SVR) or you can choose to re-mortgage. With SVR remember that the interest rate is usually higher than what you have paid in fixed, leading to a significant increase in your monthly instalments.

The pros

       ●       Being able to plan finances for a fixed period and budget yourself for an increase.

The cons

       ●       Fixed rates are normally fixed at higher than variable ‘floating’ rate mortgages.

       ●       You won’t be able to take advantage of falling interest rates.

There are penalties for trying to exit a fixed rate deal and these can prove costly. Also, remember that you need to shop around for another mortgage deal at least two months before your current deal expires. If not, your mortgage shifts by default to the standard variable rate your lender offers.

Variable rates of interest, or ‘floating’ mortgages: As the name suggests, the rates can change at any time as they float along on the market rate. What is important is that you have enough income that allows you to deal with times when the rates are high and your instalments are resultantly higher. Check for discounts at the beginning of your mortgage period with variable rates.

Standard Variable Rates (SVR) of interest: This rate of interest is applied by your bank and follows the country’s prevailing base rates. With this option, you will remain on one rate for the time frame of your mortgage or till you find another deal that works for you. Be prepared to have your interest rates fluctuate according to the changes in the national daily.

The pros

       ●       You can opt out of this deal at any time, allowing you to take up another good one that may come your way.

The cons

       ●       The interest rate is constantly fluctuating making planning your finances a bit difficult for your loan period.

Discounted rates of interest: Every lender offers an SVR which is applicable for a fixed period – usually two or three years. But don’t make the mistake of assuming that the larger the discount advertised, the lower the interest rates. Make the effort to look around because every lender can have a different SVR that they follow.

The pros

       ●       Monthly payments are lower considering the cheaper rates.

       ●       Lenders sometimes bring down their SVR and this means your repayment amounts are lowered too.

The cons

       ●       Such fluctuating SVRs can play havoc with your budgeting.

       ●       If the national base rates increase, discount rates will rise too.

       ●       There are charges to exit the scheme if you opt out before the discount period.

 Tracker rates of interest: These rates are in line with the national base rate applicable at the time, with an added percentage. Every increase in the base rate percentage means an increase in the rate you are paying. These tracker rates are usually for two to five years. But, there are a few lenders who will offer you tracker rates for the duration of your mortgage or till you find a better deal.

The pros

       ●       Your mortgage payments will reduce each time the tracker rates reduce.

The cons

       ●       And in the exact opposite, your payments will increase if tracking rates go up.

       ●       Switching to a better deal may cost you an early repayment charge.

 When shopping around for the right mortgage rates, it is important to compare deals to see which one will work the best for you. Several aggregator apps will show you a side-by-side comparison, helping you make a decision that suits your requirements the best. For more information and daily mortgage rates visit mortgages.co.nz

Compare listings