Setting a Construction Period
You can choose a construction period of up to 12 months. This allows you to increase or decrease your interest reserves, and ensures you have sufficient funds to complete the home. There is no disadvantage to completing your home sooner. Once completed, you will settle the NewBuild Plan Finance and maintain your permanent mortgage in the traditional manner.
Interest Rate through Construction
Your interest will be calculated only on the amounts progressively drawn down at the current floating rate. You may elect to pay full or partial interest payments - or no interest at all if you have sufficient funds set-aside in your interest reserve account. (See Reserve Accounts).
Benefit of Additional Home Inspections
To ensure correct amounts are being paid to your builder NewBuild Plan arranges trade qualified building inspectors to inspect your home. They provide a detailed list of work fully and partially completed, which is checked against the predetermined yet flexible payment schedule.
This monitoring process is also used to help identify potential structural issues before proceeding to the next building stage. While the lender relies on the builder and council inspectors to evaluate structural compliance, our inspectors also provide advice on quality of workmanship. They may recommend a "stop payment" if necessary until remedial work is completed.
The Big Question - When to Fix, When to FloatAttached is a nice summary of choosing an interest rate structure. It's often said you can save more money by picking your fixed and floating rates for the right terms more than you can be chasing the lowest rate.Interest rates are likely to rise late 2012, they’ll be affected by things like:
- House Prices.
- Retail Spending.
- Business Investment.
- Housing market is tight
- and supply is limited.
- Gradually recovering as confidence improves.
- Eurozone downturn threatens export led recovery.
- Starting to increase although businesses are still cautious.
It’s certainly a question that plenty of homeowners are asking right now. And the best way to answer it is to weigh up your priorities and choose the rate and the term that’s best for you. So here are some things you may want to think about.
Why choose a fixed rate?
A fixed rate means you’ll know exactly what your repayments will be over a fixed term. So whatever interest rates do, you’ll be able to budget for your repayments with certainty. You can even increase the amount you repay by up to $1,000 a month or $500 each fortnight without any penalties (as long as those increased payments remain for the fixed rate period.)
Why choose a floating rate?
Right now, floating rates are lower than fixed rates. While it’s unlikely they’ll stay that way, they are currently the cheapest way to borrow money. They’re also more flexible if you want to make extra repayments on your loan at any time. The downside of a floating rate is that rates can change at any time – and that means your regular repayments will change too.
What can you afford?
When planning your budget, it’s a good idea to think about the impact of rate increases. If your regular repayments go up, what will this mean for your other financial commitments and lifestyle costs such as holidays and entertainment.
What’s the cost of certainty?
While it will cost a little more to fix your loan now, over time the price difference between a fixed and floating rate is likely to be small. That’s the price of knowing exactly what your regular repayments will be.
What are your plans?
Your personal plans also impact your interest rate decision. If it’s likely you’ll be making a lump sum payment on your loan in the near future, you may be better to keep a floating rate or only fix for a short term.
Is it a good idea to split?
By splitting your loan between a fixed and a floating rate, you can strike a balance between certainty and flexibility. How you split the loans depends on which of these is more important to you.
Most Kiwis have been enjoying low home loan interest rates for a while. So how should you handle your home loan?
Should you fix? Should you float? Should you split things down the middle? Only you can answer that question, but this update is designed to help you make a decision about your home loan.
We’ve included an economic outlook that summarises the current situation along with some things to consider around home loans and a summary of the pros and cons of fixing your rate over various different terms.
Remember, there’s no way to guarantee a perfect decision on home loan rates. But there are things to bear in mind when making the best decision for you.
In its January review, the Reserve Bank of New Zealand (RBNZ) held the Official Cash Rate (OCR) at 2.50%, as expected.
Increases in the OCR are largely dependant on the global outlook and specifically developments in Europe.
With all the global uncertainty, at this stage we expect the RBNZ to put off any increase in the OCR until December, 2012.
What about current rates?
The floating rates remain the cheapest on offer for shorter terms. However, as we get closer to an expected series of floating rate increases, the difference between the expected costs of floating versus fixing is getting smaller. We expect the current floating rates to go up around December, 2012 in line with expected OCR increases. By the end of next year we expect the floating mortage rate will be about 1.5% higher than the current rate.
News in a nutshell.
• Floating rates are cheaper, generally.
• Fixing your rate gives you certainty of repayments.
• Right now, the cost of that certainty is minimal.
• You may choose to split your loan over fixed and floating.
Short term (Floating, 6 months, 1 year)
• Low rates now: Right now, short-term rates are lower and floating rates are the lowest of all. Sticking with these will mean you’ll pay less for your loan in the short-term.
• May stay low: If the RBNZ lifts rates more gradually than expected, floating would continue to be the cheapest option.
• Flexibility: If you have a floating rate, you can always lock in a fixed rate at any time. You can also make extra repayments if you choose.
• Missing a deal: Getting a 1-year term may give you fewer benefits than a 2-year term if rates go up as expected – especially if the RBNZ lifts interest rates more aggressively than currently expected.
Medium term (18 months, 2 years, 3 years)
• More certainty: By fixing now, you’ll know how much your payments will be, regardless of any changes.
• 3-year rate is unlikely to stay as low as it is now. This could be a good time to take advantage if you like to know what your repayments will be for three years.
• Chance of paying extra: If the RBNZ increases the OCR more gradually than expected you may end up paying interest at a higher rate for longer than you need to.
Long term (4 years, 5 years)
• Certainty: With these rates you’ll know exactly what your repayments will be for much longer than shorter terms.
• Higher rates: If the OCR goes up more gradually than expected you could end up paying more than you need to.
Sovereign To fix or not to fix - Feb 12.pdf
The information contained in this newsletter is current as at February 2012.
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Views expressed in the above articles are those of the authors as at the date of this newsletter and are based on information and sources believed but not warranted to be correct. Neither ASB Bank Limited nor any person involved in preparing this newsletter accepts any liability for any loss or damage whatsoever that may directly or indirectly result from any information or omission contained in this newsletter.