Mortgage strategies

Mortgage rates could remain high into 2009 - and there's no consensus from the economic experts about when they'll fall. So there are several possible ways of re-arranging your mortgage.

Borrowers tend to chase the lowest fixed rates available. For those who need certainty and are on a tight budget this can be the best strategy.

But there are cheaper options: in 2007 we looked at five mortgage strategies.

• The cheapest was to use a revolving line of credit (RLOC) together with a series of two-year fixed-rate mortgages. The trick here was to pay off debt steadily with the RLOC (into which all salary and income was paid). This strategy also assumed that the borrowers paid for most of their everyday expenses with a credit card and made maximum use of their card's interest-free period.
  
  
• Another strategy is to opt for a fixed rate of six months or a year, in the hope that interest rates will fall quickly at the end of that period.
  
  
• Or you could go mainly for two-year fixed terms, with possibly part of the mortgage on a five-year term in case rates don't fall fast or far enough. Getting a reasonable five-year rate may be tricky: some non-bank lenders were charging well over 10 per cent and closer to 11 per cent for a 5-year fixed term, although the major banks were charging less when we went to print.
  
  
• Borrowers with larger mortgages could consider fixing their mortgage over a range of time periods, so that only a certain amount has to be re-borrowed at a possibly higher rate each year.

Revolving credit loans

We recently asked readers for their experiences in using revolving line of credit (RLOC) mortgages. Most of those who wrote to us were happy with their RLOCs, but several said that they needed to budget carefully to make the most of them. One reader swapped a RLOC for a fixed rate because it had been too difficult to keep the debt down once the interest rate started to rise: "budgeting was a nightmare".

Another reader said: "We got a $100k line of credit four years ago to cover most of our mortgage. Initially it was fine and we only withdrew funds once, but in the past six months we've really struggled with it. Our mortgage should have been paid off by now - but we've redrawn significant amounts to 'pay down' our credit card, then seen the credit card pop right back up again. We still like the line of credit and are glad to have it, but it takes a new level of discipline to manage it responsibly."

Steve Southall (pictured) from Birkenhead told us: "I took out a combined RLOC and fixed mortgage on a property I purchased a year ago. As a contractor my income is intermittent, so the RLOC account gives me a lot of flexibility.

The temptation is to spend, but with a bit of self-discipline a RLOC account is an excellent tool for managing my finances and certainly better than incurring interest on my Visa card."

Jack and Irene Burden of Taupo have had a RLOC for three years and said that it was an "absolute boon" when they needed bridging finance for about five months. It was much cheaper than a conventional bridging loan. The Burdens have dipped into their loan since (during a period of illness in the family) but they're now mortgage free. They'll keep their RLOC, though: it's "an excellent standby for quick money ... but we don't take any money out unless we know there is some coming in to cover it."

The message seems to be that RLOCs are flexible and can save you money on your mortgage - provided you have the financial discipline for the long haul.