Financial Strategies for Kiwi Home Owners

Is your mortgage structured to save you money and help you get ahead? Your home loan is typically your biggest expense, but it can also be your most powerful financial tool. We've compiled the guides, calculators, and frameworks our advisers use to help homeowners lower their interest costs, pay off their mortgage faster, or strategically unlock equity for their next big goal.

Owning a home is just the beginning. Whether you want to buy an investment property, upsize, downsize, cut years off your mortgage or do it all — we've helped thousands of homeowners like you reach their goals.

To help you get started we're lifting the curtain and sharing the process we use with our clients, plus everything we've learned during our years working as financial advisors. You'll learn about:

• How to calculate the usable equity in your home
• How you can use your equity
• Smart ways to structure your debt that'll give you more control
• How you could buy an investment property with no cash deposit
• How you could cut years off your mortgage

Ultimately, this guide will provide you with a blueprint to getting the most out of your mortgage — whatever that means for you.

Equity — the homeowner's superpower

Equity = Property Market Value − Mortgage

Equity is the market value of your property less your mortgage debt. In other words, roughly it's what you'd receive if you sold your house after paying back your mortgage. For example, if you owned a property worth $1 million with a $600,000 mortgage, your equity would be $400,000.

Equity is an important concept because in most cases you can tap into it to invest, renovate or spend without selling your house. You can do this by increasing your mortgage — but there are a few rules of thumb you'll need to know first.

How to Increase Your Equity

When your equity increases, generally the amount that you can borrow increases too. There are two ways that your equity can increase:

1. When the value of your property increases
2. When you pay down your mortgage

If you've been in your home for several years, chances are you've paid off a big chunk of your mortgage. If you've done any renovations or improved your home, its value might have increased. And even if you haven't improved your property, the market generally trends upward and its value may have increased over time anyway. In all of these scenarios your equity will have increased.

LVRs Explained

The Reserve Bank of New Zealand sets limits on the amount people can borrow against their properties. These are called loan to value restrictions or LVRs.

For your main home, you can borrow a maximum of 80% of its value, leaving 20% equity. For an investment property, you can borrow a maximum of 70% of its value, leaving 30% equity.

While these limits apply to the majority of borrowers, there are exceptions. Banks are allowed to do 5% of their lending to investors with low LVRs (below 30% deposits) and 20% of their lending to homeowners with low LVRs (below 20% deposit). The mortgage advisors at Blueprint Finance have relationships with the banks and applying through us may increase your chance of securing low LVR borrowing.

Understanding Usable Equity

Usable Equity = Total Equity − 20% of Home Value

Usable equity is the amount of equity you have that you can tap into, or borrow against. For homeowners, usable equity often equals total equity minus 20% of home value.

For example, let's say you bought a home worth $1 million with a $200,000 deposit. If its value increased by just 3% every year for five years, it'd be worth $1.159 million. In this case your usable equity would be almost $130,000 (plus any amount you've paid off the loan principal).

Structuring Your Loan and Equity

Your financial circumstances and goals are unique, so your mortgage should be too. In our strategy sessions we work on tailoring your loan to help you achieve your goals. There are several ways to access equity and structure your loan:

Topping Up to Consolidate Debt

If you've got credit cards, car loans, hire purchase cards or other high-interest debt, topping up your mortgage to roll it all in could be a great idea. You'll pay a lower interest rate and the minimum repayments may be much lower. To make sure you don't pay too much interest on the added debt, simply increase your repayments on your fixed term.

Using a Revolving Credit to Pay Debt Down

Do you get large bonuses at work? Or is your income a little lumpy as a business owner? A revolving credit could be a great way to pay less interest and smooth out your cash flow worries, allowing you to withdraw cash from your home loan account without notice.

Using a Revolving Credit to Renovate

A revolving credit may also be a great way to renovate your home. You can withdraw money when you need it, meaning you're only charged interest on the money you actually owe. This can be a smarter way to fund renovations than taking out a lump-sum loan.

Releasing Cash as a Deposit

If you're looking to buy an investment property, you could increase the mortgage on your home and release cash to use as a deposit. That way you may be able to go with a different bank for your investment property to avoid cross-collateralisation — which is when you borrow from one bank for multiple properties, giving that one lender power to sell all properties if something goes wrong.

Structuring Your Mortgage for Success

The way your mortgage is structured can make a massive difference to how quickly you pay it off and how much interest you pay over time.

Fixed Interest Rates

Fixed interest rates stay the same for a set period, usually six months to five years. You'll get certainty, knowing your repayments will be the same during the fixed period, and you'll be protected if market rates increase. The downside is that fixed rates can be inflexible — you may be charged fees for making extra repayments, and if market rates go down yours won't.

Floating Interest Rates

Floating interest rates go up and down with the market. These offer great flexibility — you can usually make as many extra repayments as you want without fees, and if market rates go down you'll benefit. That said, your repayment amounts may change every month, and if market rates go up, so will yours.

We usually recommend that our clients have the majority of their mortgage on fixed interest rates. In most circumstances it's simply cheaper, but we make recommendations on a case-by-case basis.

Interest Rate Averaging

One of the drawbacks of fixed interest rates is that when market rates go up and you have to refix, it can be a shock when your repayments increase. To protect yourself, we often recommend splitting your mortgage into portions and fixing each for a different length of time.

For example, you could fix one third for 1 year, one third for 2 years, and the remainder for 3 years. When your one-year portion is up for renewal and rates have risen, the impact on your cash flow is much smaller. Then in two or three years when rates might have come down, you'll benefit when you refix those portions.

Should You Refinance?

Refinancing means moving your mortgage to a new lender. It might make sense if you can get better interest rates, cash back offers, a better structure, or want to consolidate debt.

There are costs involved — legal fees (typically $800–$1,500), possible break fees if leaving a fixed rate early, and sometimes valuation costs. In many cases, the cash back from your new bank will cover these costs and leave you better off.

Revolving Credit — A Smart Money Tool

A revolving credit turns part of your mortgage into something like a big overdraft. You can make as many extra repayments as you'd like, then access all the funds at any time up to a set limit.

For example, let's say you've got a $20,000 revolving credit. As a business owner you get paid $20,000 one month, then much less for the next two months. You could deposit the entire $20,000 when you get paid — you'll pay no interest on that portion while the full amount is in there. Then during leaner months you can slowly withdraw to cover bills and living costs, only paying interest on the money you use.

Lots of people combine revolving credit with fixed rates: you get the flexibility of the revolving credit combined with the certainty of a fixed rate. You can also use a revolving credit to systematically reduce your mortgage — pay down the $20,000 facility, reduce your mortgage by that amount, then get another $20,000 revolving credit and repeat. This can help you pay your mortgage off years earlier.

Offset Account

An offset account is a transaction or savings account linked to your mortgage. Money deposited into this account directly reduces your loan balance for interest calculation purposes — you'll only pay interest on your mortgage principal minus the balance of your offset account.

This is handy if you've got a lump sum of cash or you expect to receive an inheritance. In most cases the interest rate return will be higher than term deposits and savings accounts, especially because these savings are not taxed.

Which Is Right for You?

The right option depends on your personality, preferences, and goals.

An offset account may be better if you prefer to keep your finances compartmentalised and tidy, without sacrificing easy access to cash and still decreasing interest.

A revolving credit might be better if you prefer a streamlined, simplified approach where all your money comes in and out of one big account. Avoid revolving credit if you're prone to impulse spending or plan to only make minimum repayments.

Review Your Mortgage Regularly

It's a good idea to check your mortgage at least once a year — or every time your fixed rates come up for renewal — to make sure it still suits you. It's also smart to review after big life changes such as changing jobs, a new family member, or getting a pay rise.

Consider switching lenders regularly to unlock fresh cashback benefits, and keep your repayments the same when rates decrease to accelerate your payoff.

Blueprint Finance provides 60-day pre-renewal notifications to ensure your mortgage continues to support your goals.