With interest rates having eased over the last 12-months, it’s understandable that many of us are wondering whether now’s the time to enjoy a bit of breathing room on repayments.
But there’s a smarter opportunity worth considering. When your interest rate drops, your minimum repayment usually drops with it. But… if you maintain your higher repayment level, a larger portion goes straight to reducing your loan balance rather than paying interest. Over time, this can dramatically reduce the life of your mortgage and the total amount of interest you’ll pay. It’s one of the most effective ways to build equity faster and reduce long-term financial pressure. Plus, it doesn’t have to be a huge amount for it to make a significant impact.
We recently did a review for a client with a $750,000 mortgage on a 30-year term. Their interest rate for the last 12-months has been 6.25 percent, with monthly repayments of $4,618.
However, with rates having eased, they now have the opportunity to refix at a rate of 4.85 percent, which dropped their monthly minimum repayments to $3,958 per month – a saving of $660 per month over what they’d been paying previously.
Now, if they moved their repayments to the new minimum amount, then (based on the 4.85 percent interest rate) the total interest paid over the 30-year loan term is estimated to be $674,607 with the total cost of the loan being $1,424,607.
However, after chatting to the client about their options and looking at what they wanted to continue to pay, the client decided to split the difference on the $660 they could now save.
This meant they had another $330 in their back pocket each month but were also able to overpay their loan minimum payments by $330 each month. We also recommended a couple of other small adjustments to the structure of their loan, which they accepted. Based on the new interest rate, the overpayments, and some small tweaks to their loan structure, we estimate the client has the potential to:
This simple change didn’t a dramatic lifestyle shift (and in fact, it still allowed the client to put funds back into their pockets), but will deliver a substantial financial advantage to them over time.
If you’re in a position to pay more than the minimum, it’s one of the most reliable strategies for long-term financial freedom. You don’t need to pick the right time to invest or worry about market performance. The savings are real and predictable. Plus, with interest rates dropping, overpaying has become even more accessible as the savings gained from falling interest rates can be redirected into your mortgage allowing you to:
As rates drop, or for borrowers with surplus income, this approach offers far better value than leaving money sitting in a low-interest savings account.
Before making any decisions around your mortgage strategy, it is important to seek financial advice and chat to an adviser about your specific circumstances. A quick review with your adviser can help make sure your structure supports your goals and avoids unnecessary costs.
Every client’s situation is different, but the opportunity to get ahead while rates are dropping is one worth exploring. At Threefold, we can model your potential savings, restructure your lending if needed, and help you make confident decisions about how to reduce your mortgage faster.
Plus, if you book a complimentary mortgage, insurance or KiwiSaver review this month, you’ll go in the draw to win a month’s free mortgage repayments on us – which should certainly help move you one-step closer to your financial goals! To book your free review, click here.
The content of this article should not be taken as financial advice, or a recommendation of any financial product. These insights are based on current economic commentary, market pricing for interest rates and our personal opinion. Threefold is not liable or responsible for any information, omissions, or errors present.