Debt Free Diva discusses pros, cons
Should Kiwis consider splitting their home loan in a rising interest rate market?
Quantum Finance’s self-proclaimed “Debt Free Diva” Tracy Hemingway (pictured) said there was advantages and disadvantages to splitting to part-fixed, part-variable or sticking with a fully variable loan.
“At the moment no one knows what the economy is doing, so by splitting your home loan at least gives you the certainty of what your interest rate and mortgage repayments will be for one, two, or three years,” Hemingway said. “By splitting your mortgage, you also spread the risk of interest rate rises over different loan terms, so your clients are able to budget easier, especially if they are conscious about their finances.”
Hemingway said a disadvantage of splitting your mortgage repayments was if you locked in your interest rate for a fixed period and rates go down, the client would be stuck paying the higher interest rate.
“Clients are then locked into that structure for a fixed term, so if they experience a life change, then they are locked into those payments and that loan structure for the fixed amount of time,” she said. “This does provide the client less flexibility for the unknown.”
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Hemingway said in order to work out whether her clients should fix their home loan or not, she has an in-depth conversation about loan structure and brings it back to what their goals are for the next five years.
“I ask my clients if they are expecting a change in income? A promotion at work, a career change? By looking at their goals in the long term, that’s when I can make an advice call,” she said. “I also find out the reason they are purchasing the property – whether it’s their first home, an investment, or their forever home. The decision really is client dependant.”
Hemingway said having these types of conversations involving risk adversity was important.
“Each client is different as some do not want to take a risk, however some are happy to lock in their interest rate for five years and have the assurance of what their repayment will be,” she said. “As advisers that is our job. My client comes to me to tell me what their goals and dreams are and I need to find the solution to match that. It is not my job to judge, I just want to help them get there.”
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Hemingway said as interest rates were so volatile at the moment, she recommends to her clients to fix their interest rate for the time being.
“Rates are literally changing daily between lenders and our rates are not normal,” she said. “My advice to clients at the moment is lock in now for 12 months and let’s see where we are sitting in 12 months from now.”
