When it comes to your financial life, knowledge is power. By staying updated with current market trends, and understanding the dynamics that drive mortgage rate movements, you can prepare for future rate shifts.
Of course, no one knows where interest rates will head next. But being informed allows you to strategise more effectively, based on your circumstances and goals.
Mortgage structures aren't a one-size-fits-all solution. What worked for you at one stage of your life may not be as effective at another. And when mortgage rates fluctuate, you may find it advantageous to revise your mortgage structure to better align with your financial goals.
For example, it may be right for you to split your mortgage into a mix of fixed and floating rates. This way, you can take advantage of interest rate drops and avoid having your whole mortgage at a higher rate when mortgage rates increase. On the other hand, if you’re on a fixed-term mortgage rate and rates drop, you’re stuck with that higher rate until the expiry date. while you could possibly break it to refix at a lower rate, this usually involves a break fee that might offset any savings you could make.
The other benefit of having a split fixed-floating mortgage is that you can make unlimited extra payments on the floating portion without incurring an early-repayment penalty – paying off your mortgage faster and reducing interest rate costs.
While the temptation to reduce your repayment amount when interest rates drop can be strong (and sometimes necessary, budget-wise), keeping your payments the same can also be a beneficial strategy. Essentially, it means you’ll be making extra repayments on your loan, reducing the principal faster, and subsequently, the total interest payable over the mortgage’s lifespan.
You may be surprised at the impact this simple tactic can make in the long run. Let’s say, for example, that you have a $400,000 mortgage*. At a fixed- mortgage rate of 6.69%, you are paying $595 weekly, and the total interest cost you’ll pay over 30 years if the interest rate stays the same is $527,626.
Suppose that tomorrow you could refix at 5.3%: your minimum repayment would fall to $513 weekly, and the overall interest you’d pay would be $399,086. But if you maintained the same repayment amount of $595/week – which is already accounted for in your budget – the overall interest cost would drop to $275,074, and you’d repay the mortgage in 22 years instead of 30, again, assuming the interest rate stays the same.
No one knows when mortgage rates will drop again, but it’s crucial to be ready and have a strategy for when this will happen. If you’d like to learn more, get in touch – as mortgage advisers, we can help you make well-informed decisions about your home loan.
*Calculation made using Sorted’s Mortgage Calculator.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
Link Financial Group Ltd trading as Mortgage Link and Insurance Link FSP 696731 holds a licence issued by the Financial Markets Authority to provide financial advice. Please visit https://mortgagelink.co.nz/available-disclosure/ for more information and Disclosure information.