Know the true cost of a mort­gage

Auckland City Harbour News - - OPINION - By ROB STOCK

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.

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