Liz Koh: Flexibility important in home financing

By Liz Koh


It has been many years since we've seen mortgage interest rates so low. That's great news for first home buyers and investors in particular. Banks appear to be in a bidding war to attract borrowers.

Meanwhile, the Reserve Bank is implementing measures to restrain mortgage lending so as to reduce the risk of house price inflation.

Borrowing money at a low interest rate is both an opportunity and a threat.

Interest rates move in cycles. Borrow at the low point of a cycle and it goes without saying that, over time, interest rates will increase, thus increasing your mortgage payments.

There are steps you can take to protect yourself when borrowing at low interest rates.

While it is tempting to take advantage of lower rates to borrow as much as possible, your repayments may become unaffordable when interest rates increase. It is sensible to leave yourself some wriggle room by borrowing an amount that you know will be affordable when interest rates rise by a couple of per cent.

Fixing the interest rate for the whole of your mortgage for a period of time can create uncertainty about what the interest rate will be at the end of the period. To reduce this uncertainty, consider chunking your mortgage up into two to three amounts that are fixed for different periods of time.

That way, if rates go up, only part of your mortgage will be affected at any one time, thus spreading the impact of higher mortgage repayments.

While it may seem a good idea to lock in a low interest rate for a long period of time, be aware that if your circumstances change and you need to sell your property or repay your mortgage for some other reason, you may be charged a penalty for early repayment.

Liz Koh is an authorised financial adviser. The advice given here is general and doesn't constitute specific advice to any person. A free disclosure statement can be obtained by calling 0800 273 847.

- Hamilton News

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