Interest rates matter
In all the current chatter about rising mortgage rates it is possible to lose sight of the principles of getting on top of the home loan.
The rate of interest rate you pay matters and it is definitely worth haggling with your bank over regularly.
But it’s only one part of the picture.
The rate at which you repay matters a great deal too.
Mike Columbus from Kiwibankowned New Zealand Home Loans, whose blog I keep an eye on, wrote this in January: ‘‘If I had to choose two variables to determine whether a mortgage was a good one or a poor one it would be: Length of mortgage and total interest cost.’’
His is a perspective listening to.
When it comes to planning repayments on the home loan, reducing the length of the mortgage is a very good place to concentrate some effort.
Having a play on an online mortgage calculator like the ANZ’s shows how this effect works.
Assuming an 8 per cent mortgage rate over the lifetime of your loan, repaying $250,000 over the now standard term of 30 years results in repayments of $1834 a month, interest costs of $410,388, and total payments to the bank of $660,388.
Drop the term by five years and the repayments go up to $1930 a month (just over $22 a week more) but total payments to the bank
worth drop to $578,862.
That extra $28,800 of ‘‘extra’’ repayments in the 25 years dropped the payments made to the bank by just over $81,500.
Go from 25 years to 20 and repayments jump to $2091 (Just under $60 a week over the 30-year repayment plan) and the total cost of the loan is $501,864.
The ‘‘extra’’ $61,680 repaid in the 20 years, dropped the payments to the bank by over $158,500.
The figures are enough to encourage anybody to go back and have a look at strategies to kill the mortgage earlier and praise where it is due, the ANZ calculator encourages borrowers to experiment with lifting repayments to reduce the term of their loan and pay less interest to the bank.
Of course, mortgage payments have to be balanced with other spending needs and wants.
We can’t all live like monks. Some fun has to be had.
On that front, I’ve sometimes been a bit parsimonious and underspent on the trappings of life like cars, furniture and nice clothes, I do admit, partly because the first time I got a mortgage, it was the first debt I had ever incurred and it scared me.
Back then I didn’t earn much and the debt, modest by today’s standards for a first home-buyer was small, as was, I might say the house, which was in a red-brick estate of newish houses on the edge of an otherwise pretty little village outside of Cambridge in England, from which I commuted into London to write for a newspaper for financial advisers.
As a result of those early debt jitters, I fell into a habit of trying to repay as quickly as possible.
Planning can help such debt vanish surprisingly quickly and even $20 or $25 a week can make a stunning difference in the long term.