How to put your home loan to work

This article first appeared on Stuff.co.nz on 17 June 2014

No matter how far along the path you are to owning your own abode, banking experts agree there are many ways to ensure you are getting the best out of your home loan package.

Loans come in all shapes and sizes, with borrowers asked to consider a multitude of different options when taking out a new mortgage or refinancing an existing one.

Key decisions will need to be made on items such as variable or fixed interest rates, interest ­only repayments, or whether to take out specialised insurance plans.

DO THE RESEARCH

Ian Boyce, ASB Bank's General Manager Business Banking and Retail Specialist Services, recommends spending some time ensuring you have the best package depending on your needs.

"Your home loan options are not limited to fixed or floating rates and a customer should have the home loan option that best suits them and their financial situation," Boyce says.

Once the decision is made on the type of loan you need, the next step is to ask the lender for a letter of offer which details items such as how the loan is structured. This includes the amount, the term of the loan and the frequency of repayments. This should also include the cost of the loan with any fees, the interest rate and terms of that rate including any penalties for making additional repayments.

"Whether you are a first home buyer or an existing home owner, the bank is there to guide you through the process and provide you with all of the options. But at the end of the day it is up to you what options you choose," Boyce says.

HOW MUCH SHOULD I BORROW?

All banks have a duty of care to ensure home owners only borrow what they can afford to pay back.

However, to ensure you are not stuck attempting to service a mortgage that you can ill afford - or worse still, watching the home you love sold from underneath you - Boyce says it is best to be upfront about your financial position right from the start.

"Lenders make decisions based on full disclosure from their clients so providing an accurate account of your financial position from the onset ensures both parties know where they stand," he says.

Of course, your financial situation may change. Partnership breakdowns, redundancies and expanding families can have an impact on your ability to pay back a home loan.

Boyce recommends talking to the bank if your financial situation changes and the sooner you do this the better.

"ASB have a Financial Help Team who are there to help customers who find themselves in financial difficulty."

ASK THE QUESTION

No one wants to pay more in interest than they have to, so Boyce recommends asking your bank to see how much interest you could save by submitting additional payments on your home loan.

"By redirecting the cost of your daily cup of coffee into your home loan, you can potentially save thousands of dollars over the life of your loan."

THINK OUTSIDE THE SQUARE

While it is important for borrowers to understand their buying power, it is also crucial that they understand that home loan options are not always limited.

Boyce says the best lenders understand that homeowners require flexibility, so it's worth looking at options such as tying in your home loan with a revolving line of credit to ensure that you have access to funds as and when you need them.

Often banks will allow borrowers to split their overall home loan between a fixed rate loan and a package such as ASB's Orbit loan ­ which works like an overdraft facility on a normal transaction account - only with no principal repayments.

He says these types of packages are worth looking into because they also allow borrowers the opportunity to direct all income into the account, keeping the balance as low as possible in order to reduce the amount of interest.

TOP TIPS

• Understand the details of your home loan and ask the bank to help if you don't.
• Be honest with your bank about your financial situation.
• Consider increasing your loan repayments ­ the smallest amount can save you significant amounts of interest.
• Look into a flexible credit facility if this product suits your financial situation.

Click here to find out more about getting a home loan with ASB.