Silver lining to credit crunch

By Andrea Milner – NZ Herald

The time needed to pay off the average mortgage has dropped by half since the financial crisis started. Thanks to lower interest rates, mortgage broker Darren Pratley says borrowers coming off high fixed rates who can keep their mortgage payments the same can cut their loan term dramatically.

This time last year, the typical monthly payment for a borrower with a $300,000 mortgage on a 30-year term, paying the one-year fixed rate of 9.2 per cent, was $567.48 a week. Now, with one-year fixed terms at 5.5 per cent, they could pay $393.40 – $174.08 less. But if they kept up the higher payment, they could shave 15 years off their loan term. The catch, says Pratley, is that interest rates could be higher when the one-year fixed rate expires. “So it gives you a one-year window to reduce your mortgage amount.” The borrower dropping from an interest rate of 9.2 per cent to 5.5 per cent but keeping their payment the same would owe $287,887 after one year. Pratley says: “There is a real window of opportunity there with that lower rate if you’re coming off that sort of level.”

A good broker, Pratley says, can help the client split their loan, for example putting part of it on a one-year fixed rate to give the flexibility of paying it off faster, and part on five years to give certainty. Mortgage broker Geoff Bawden says borrowers commonly believe the interest rate determines the best deal when it comes to home loans.

While that is important, Bawden says getting the right structure often gives greater savings. The longer the loan term, the more it costs the borrower in interest, so paying more than the minimum amount required is a way to reduce that cost. “Right now there are a lot of people who are coming off high fixed-interest rates, which provides an opportunity for them to consider whether they might be able to pay more than the required minimum,” he says.

A homeowner with a $250,000 mortgage coming off a fixed rate of 9.4 per cent to a floating rate of 6.4 per cent could pay $625 a month less. But if they continued to pay that voluntarily, they would halve a standard 30-year loan term to 15 years and save more than $176,000 in interest. Even someone who applies the cost of two coffees a week – about $9 – to boost their mortgage payments would reduce a 30-year term by two years and save interest of more than $2600.

Cash in with a few dollars more

Chris Christofides’ home loan just rolled off a fixed interest rate of 8.95 per cent to a new rate of 5.5 per cent, but he opted to make the same monthly payments of $1690. He says as he was able to manage the payments, he decided to keep it up, because he knocks an extra $350 off his loan principal each month. “We all look to have a few more dollars in our pocket, but … more often than not, they’re wasted,” Christofides says. “Even a small amount of financial discipline is money in the bank.”