No, there’s nothing wrong with your eyes. Yes, the number in the headline is correct. Kiwibank’s new variable mortgage rate really is 3.4%, which brings it in line with the bank’s standard one-year fixed interest rate (for those with less than a 20% deposit).
When it comes into effect, the new variable rate will be a full percentage point lower than the current average floating rate offered by other lenders, according to data on Canstar’s database (correct as of 5/6/20).
In a statement, Kiwibank Chief Executive Steve Jurkovich said that the move would give “Kiwibank customers greater flexibility, choice and savings – providing an opportunity to pay back their loans faster”.
But how? What’s the point of going with Kiwibanks’ new variable rate (3.4%), especially if you have more than 20% equity, which qualifies you for the bank’s special one-year fixed rate of 2.65%.
The answer lies not in the rate itself, but how clever mortgage holders can use the flexibility of the low variable rate and pair it with an offset mortgage to benefit their repayment strategy.
The pros and cons of a variable rate
– As its name suggests, a variable rate can go up and down at any time. This is great if it moves down, but can cause problems if it goes up, especially if you’re working to a strict budget. However, in the current financial climate interest rates are at historic lows, and it appears they’ll be stuck there for the foreseeable future.
– Variable rates are also usually higher than fixed rates, and part of this is due to the banks charging more for the flexibility that comes with a variable rate, and the fact that financially astute customers can use variable rates to their advantage …
– You can increase your regular mortgage payments or make lump sum payments for no extra charge, unlike a fixed-mortgage.
– When paired with an offset mortgage, you can make substantial savings on interest repayments on your home loan.
What is an offset mortgage?
An offset mortgage deducts the cash you have in your other accounts with your lender from the total of your home loan.
Currently, Kiwibank’s offset mortgage allows you to link up to eight Kiwibank savings and everyday accounts to your home loan.
For example, if you’ve a mortgage of $250,000 and have $30,000 sitting in your other accounts, you’ll only pay interest on $220,000.
A flexible approach
Of course, if there is a huge amount of money sloshing about in your accounts, you can save a fortune. But, what about if you’ve only got a few thousand: money put aside for a rainy day or, if you’re self-employed, provisional tax payments? If you qualify for Kiwibanks’ special one-year fixed rate of 2.65%, is the 3.4% variable rate worth the extra possible interest payments?
The answer comes out in the mix! When you take out an offset home loan, it doesn’t have to be for the entire sum you want to borrow. You can mix it up: set part of your home loan on a fixed interest rate, and part of it on floating rate, with an offset mortgage.
Using our example above, if you’ve a mortgage of $250,000, you could have most of it on the special fixed rate of 2.65%, and $50,000 on the variable rate.
With your $30,000 savings offsetting most of that $50,000 you’d only be paying the 3.4% on $20,000 of your loan.
And with the flexibility of making extra payments at no extra charge, you’ll also have the scope to pay off that $20,000 faster and without penalty.
Ultimately, your choice of mortgage must reflect what’s best for your personal finances. But the exciting thing about Kiwibank’s latest move is the extra choice it gives consumers.
Over in Australia, fixed rates and offset mortgages have long been part of the everyday mortgage landscape. But here in NZ, the higher interest rates associated with variable mortgages have always negatively impacted the possible savings they bring when paired with an offset mortgage.
Now, hopefully, other NZ lenders will follow Kiwibank’s lead and reduce their floating rates, too. If so, next time your mortgage is up for renewal, by pairing a variable rate and offsetting part of your mortgage, you could make considerable savings.
To help you make the right choice, each year Canstar reviews mortgage lenders and their products. Our 2020 Home Loan Star Ratings uses a sophisticated and unique ratings methodology that compares both cost and features across various types of home loan products. To read our report for free, just click this link. Or to compare current mortgage rates and lenders with our comparison tool, just click on the big button below!