Personal savings present savvy loan option

Monique Cairns. Photo / Supplied

Before you start house-hunting, you need to figure out how much you can afford to borrow. Part of those discussions with the bank will involve the structure a mortgage might take.

One of the more innovative is the Bank of New Zealand's TotalMoney combined savings and home loan option, which could shave years off your floating home loan by offsetting your savings against your mortgage.

For example, if your TotalMoney loan is $150,000 and you have $10,000 across your cheque and savings accounts, you'll pay interest on only $140,000 - equivalent to an interest reduction from 5.59 per cent to 5.22 per cent per annum. Repayments will remain the same, but the lower effective interest rate ups the proportion of the principal you're paying off. If savings are equivalent to the amount of the mortgage, you pay no interest at all.

You can offset total savings, some or none of them against the home loan and accrue credit interest on the pool of savings instead.

"TotalMoney is all about creating flexibility for our customers and allowing them to be in control of their money," says BNZ head of retail sales development, Monique Cairns.

For a total flat monthly fee of $10, customers can open up to 10 savings accounts exclusive of the home loan account. Each one is "nicknamed" for its goal or purpose - perhaps "holiday" or "new car".

Interest is calculated daily on the combined balance of all the accounts (including cheque accounts), less any offset home-loan balances, and paid into each one at the end of the month.

"Most people have one general savings account," says Monique. "With TotalMoney you can see at a glance how you're tracking on specific savings goals rather than looking at one big lump sum."

TotalMoney also lets individuals, non-trading companies and family groups pool their accounts to maximise credit interest or minimise home-loan repayments.

For instance, the parents of first home-buyers may have put $50,000 aside for a retirement that is some way off. By linking that account with their children's, they could either reduce the interest rate on their offspring's floating home loan, or raise the interest earned on the collective savings.

* For more information, go to www.bnz.co.nz/golower.