In­ter­est rates mat­ter

Central Leader - - OPINION -

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.

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