Know the true cost of a mortgage
It’s worth knowing the cost of every $1000 you borrow from the bank on your mortgage.
But while it’s easy to borrow, it’s not always easy to work out what the real price of it is likely to be. With the help of ANZ’s online mortgage calculator, I’ll explain.
The calculator’s default setting is an interest rate of 6.74 per cent and a 30-year mortgage term.
That’s the bank’s floating rate home loan rate, and rather terrifyingly the standard time to repay. Hit calculate and the total repayments come up as $23,326 with repayments of $65 a month per $10,000 borrowed. The interest cost is $13,326. Seems a bit steep but history suggests accepting that as the long-term cost of the loan would be a heroic act of self-delusion.
Ask a mortgage broker and they will probably say the long-term New Zealand floating rate is probably around the 8 per cent mark.
Plug 8 per cent into the bank’s mortgage calculator and the cost jumps to $16,416. It’s a sobering figure but you don’t have to put up with it. We’re all sovereign beings able to decide not to play the game by the bank’s rules. There are really only two ways to cut the amount you end up paying to the bank: pay a lower rate of interest and pay the money back faster.
The first involves tough bargaining with the bank. The second putting more of your income towards paying off the debt, and easing back just a little on your spending. Both things are worth doing. Playing about on ANZ’s mortgage calculator can help you put numbers to the power of these two strategies. Using the 6.74 per cent figure (but remember we really expect to end up paying more in the long run) we can check what happens if we repay the money over 25 years. The monthly repayments rise to $69 a month from $65. But instead of paying $13,326 interest, you pay $10,708.
Making $1200 of extra repayments in those first 15 years saves $2618 of interest. Now the results of paying a lower rate of interest.
Instead of that 6.74 per cent, threaten to go to Kiwibank for its 6.4 per cent rate. The chances are ANZ will match it. Nobody with any bargaining power pays the ‘‘carded’’ rate as the banks call the rates they put on their website.
Over 30 years the monthly repayment would drop from $65 to $63 and the interest bill would fall from $13,326 to $12,518.
Now let’s combine faster repayments and lower interest. Repaying over 25, not 30 years and at 6.4 per cent not 6.74 per cent, lifts the monthly repayment rises to $67 but the interest cost drops to $10,069. The lessons of this story aren’t hard to grasp. And going at your mortgage hammer and tongs is rarely a bad idea. History also shows us that a lot can happen in 30 years.
Since 1990, the average floating mortgage rate has been between 14.4 per cent and 6.1 per cent. Since 1998 the average two-year fixed rate has been between 9.8 per cent and 5.4 per cent.
It’s hard to see mortgage rates rising fast given the ocean of debt the world is awash with.
But when rates start rising, you’ll be pleased by every dollar less of debt that you have.