Interest rates have dropped, now what?
MORTGAGE STRATEGY - OCTOBER 2018
We’re sitting at an all year low for short-term interest rates right at this moment. The question many borrowers ask me is how to take advantage of them. I’ll break down a few common scenarios so you know what to do with your mortgage strategy, but before that, I’d like to make a claim.
30-year mortgages shouldn’t take 30 years to pay off.
Over these last several years we’ve seen the lowest mortgage rates New Zealand has ever seen (e.g. HSBC is currently dangling a 3.85% 18-month special and major banks like ASB offering 4.15% for a similar term), yet at the same time very few are paying off their loan faster.
I’ve seen families who’ve continuously been drawing on their home equity to consolidate debt, then re-structure back onto a 30-year loan and often have little to no assets come retirement.
This needs to change!
What’s missing is a strategy to tackle the family mortgage so equity can be freed up to work on building your legacy whether that being to start a business, buy another rental property, work fewer hours or give back more to the community.
Money is often more about behaviour and psychology than it is about the numbers. A strategic approach factoring in your long-term goals, income & money personality is critical in the current environment.
So, let’s look at some common questions on how to take advantage of the lower mortgage rates.
“I fixed my loan at a higher rate, I want to break it so to reduce my repayments at a lower rate”
You’d first need to calculate whether the break fee is worthwhile for the interest saved.
If it is, and you can afford to do so, we’d strongly urge to leave your repayments unchanged. Those small difference will compound over the years to come.
“How do I pick between the different fixed-term rates?”
Firstly, the advertised offer isn’t anywhere near the actual offer mortgage advisers are able to obtain. We’d need to compare the offer relative to what is reasonable for your circumstances across the market.
We should also consider any major cashflow events over that coming period to avoid any future break fees.
For those who are risk-averse and tend to lean towards the 3+ year fixed rate terms, another alternative is to set your repayments based on the 3-year rate but fix for the shorter loan term. The extra principal would compound on every repayment you make and in case interest rates do rise you’ve already made headway on your loan and can afford the higher rate.
“New bank has offered me an amazing interest rate, should I make the move?”
Not always! You should consider your total cost to move relative to the savings to move. We can help with such calculations, making it easy for you to just pick your option.
Don’t forget about your cashback obligations! Most banks tie you in 3-4 years so be mindful of having to pay that back and whether you can commit to a new bank for that long either.
Consider the offer in full. Lower interest rates often mean lower cash incentives.
It can all seem like a lot of work to constantly balance your loan and keep up to date with getting offers from multiple banks. It doesn’t have to be when you have a mortgage strategy in place. Speak to our team of Registered Financial Advisers to get your tailored mortgage strategy put in place.