This article was published on 9 December 2008. Some information may be out of date.

Falling mortgage rates your big chance to get ahead

It’s hard to believe that less than nine months ago this column featured suggestions for people facing big mortgage rate rises. Now, with floating mortgage rates falling fast, the advice is quite different.

And while it’s easier to ignore advice when the markets are moving in your favour, wise borrowers will make the most of the current opportunity to boost their wealth.

Here’s how to do that, for people with different types of mortgages:

A floating mortgage

When your lender reduces your payments, stick to your old payment level. Better still, if the rates have fallen more than once this year, stick to the highest payments. You managed to pay then, so why not now?

Apply the extra money to repaying more off the principal. You will cut many thousands of dollars of interest and several years off your loan.

That means money that used to go into your mortgage can instead go into retirement savings earlier, which in turn means retiring considerably richer.

Let’s look at a $100,000 25-year mortgage. At 9 per cent, monthly payments are $839, and total interest paid is about $126,000, according to www.sorted.org.nz.

If the rate drops to 8 per cent, payments fall to $772 and total interest to $110,000. But if you stick with $839 a month, you will repay the loan in less than 20 years, and total interest paid will be less than $87,000.

If the rate drops to 7.5 per cent, payments fall to $739 and total interest to $102,000. But if you stick with $839, you will repay the loan in 18 years and four months, and total interest will be less than $74,000.

We’re not talking theoretical numbers here. In that second example, you’ll pay $28,000 less in interest. That’s extra money for retirement fun. And if you invest it wisely it should grow considerably before you spend it.

If your mortgage is bigger than $100,000, the savings from keeping your mortgage payments at the old level will be proportionately bigger.

If your mortgage is around $200,000, double the amounts. If it is $600,000, multiply the amounts by six.

A fixed-rate mortgage

You’re probably stuck with higher-than-market interest until the term of your loan ends.

It may be worth asking how much the penalty will be if you switch to a floating rate early. But in most cases it probably won’t be worthwhile switching.

Try to cheer yourself up by remembering that, until recently, you paid lower interest than your neighbour on a floating rate. Over the last few years, you may well be ahead.

When your term expires, if rates are still lower than on your current loan, you too should try to keep your mortgage payments unchanged, to gain the same advantages as outlined above.

This may mean that you have to switch to a floating rate. If you prefer the certainty of a fixed rate, consider having part of your loan fixed and part floating. Then you can put extra payments into the floating portion.

An interest-only mortgage

Some people took out these loans, or moved to them, when interest rates were higher. However, it’s not exactly uplifting to know your debt stays the same indefinitely, especially in the current declining property market.

With interest rates falling, you can probably switch to a principal-and-interest mortgage without increasing payments.

For example, interest-only monthly payments on a $100,000 mortgage at 9 per cent are $750. If your rate drops to 8 per cent, you can repay principal and interest over 25 years at $772 a month or over 30 years at $734 a month.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.