Unless you are a ‘trust fund’ child or do not own your own property, you are likely to have a mortgage during your lifetime. Apart from your ability to earn an income, your mortgage is likely to be the financial arrangement that has the most impact on your financial success.
Therefore, managing your mortgage to reduce the interest that you pay over the life of the mortgage is crucial.
When you take out a mortgage we recommend that you apply a few important rules:
- Assume a long term average interest rate of 7-7.5% will apply to the mortgage and then work out how much you can afford to borrow. When interest rates are low (5%-6.5%) it is easy to assume that interest rates will stay at this level for a long term.This is an easy way to get trapped into higher repayments if mortgage rates increase, and get yourself into financial trouble. Make sure that you take a conservative approach, so that your mortgage is sustainable.
- If you get paid fortnightly, make your repayments fortnightly. Over 25 years if you pay half your monthly mortgage payment as a fortnightly payment, you are making 2 extra payments a year (26 fortnights, but only 24 half months). On a $350,000 mortgage, at 6% pa, you will repay your mortgage 4 YEARS earlier.
- Don’t put in place a revolving credit mortgage (no matter how hard your lender argues that it works) UNLESS you are extremely disciplined.
- Talk to your financial adviser to get recommendations on how much to fix and leave floating. This will depend on your personal circumstances and the market: whether you are likely to get extra money to be able to repay a floating rate mortgage, whether interest rates are likely to go up or down.
- BE AWARE of the length of time that the mortgage is for. The longer the mortgage, the more interest you pay. By all means set the mortgage up for a 30 year time period, but then work out how much you can pay off and set it off to repay the mortgage as quickly as you realistically can.
- Don’t lock yourself into mortgage payments that might become unsustainable if you have a change in circumstances, or if interest rates increase in the future. Leave yourself some flexibility.
- Shop around between lenders There is a lot of competition these days between lenders. They are all interested in a GOOD QUALITY mortgage prospect. If you have a good stable income and a 20% deposit on your home, a good mortgage broker can get you very competitive interest rates. In addition, depending on the offers at the time, it is possible that you might get an inducement to go with a particular lender. This could range from payment towards legal fees, or a reward holiday or a TV for your new home. The key thing however is your interest rates.
- Be aware of the security that you are giving the lender. Most lenders these days take an ‘all obligations’ mortgage over your property. This means that the property is used to secure ‘all your obligations’ to the lender. This is different to a ‘fixed sum’ mortgage, where you are only providing security to the lender for the amount that you have borrowed. Importantly, be aware of the implications of giving a personal guarantee for your mortgage. We recommend that you ask questions and be fully aware of the implications of the security that you are giving your lender.
- If you are a first home buyer or a ‘second chance’ home buyer remember to use the KiwiSaver features to help you with your house purchase. These include the ability to withdraw your contributions from KiwiSaver to put toward your house and, if you are eligible a first home buyers grant.
- Make sure that you have mortgage repayment or income protection insurance cover in place in case you get ill.
- Make sure that you have best terms and conditions on a mortgage. This table shows the difference in how much interest you will have to pay over the life of a mortgage with different interest rates. It is worth putting the time and effort into getting the best interest rate. But remember, every time you change a mortgage, you have legal costs and possibly hassle involved with changing
Total amount you are repaying on the mortgage (monthly repayments)
|$350,000 repaid over 15 years||$514,763||$531,629.80||$548,797.64||$566,261.81||$584,017.79|
|$350,000 repaid over 20 years||$577,825.34||$601,802.09||$626,281.43||$651,251.11||$676,698.28|
|$350,000 repaid over 25 years||$644,791.87||$676,516.47||$708,967.52||$742,118.16||$775,940.74|
|$350,000 repaid over 30 years||$715,414.14||$755,433.66||$796,405.71||$838,281.14||$881,010.28|
If you would like some assistance with making sure that your mortgage arrangements are working well for you, contact us by clicking here.
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By Paul Swarbrick