How Does a House Mortgage Interest Rate Calculated in NZ?
“Now is the best time to buy!”
“House prices are rising!”
“Interest rates are down!”
“Maybe wait to buy!”
“Maybe wait to buy!”
“Maybe wait to buy!”
Depending on which TV channel you watch, which papers you read, or which social media you follow you can easily find all these warnings. On the same day!
Which makes it all very difficult to know what is the best thing to do (and the real secret is that even the ‘experts’ don’t really know either).
Q: When is the best time to plant a tree?
A: About 10 years ago B: Today C: Tomorrow
Of course, the best answer is A. But unless you have a time travel machine the next best answer is ‘today’.
So, apply this question to buying your home. (Note that we did not say a house or an investment property because then different rules apply.) But if you are buying a home now is the best time to buy.
Why? Because the statistics tell us that over the long term property values will trend up. If you are looking for short-term gains in the property market that can be either profitable (if you know what you are doing) or can cause real pain. But as we said we are not talking about profit we are talking about getting you into a home.
Of course, if you buy now there is a chance that you may pay a little too much for it or if you had waited it would have been cheaper or maybe you could get a loan at 0.001% less than you did.
Or maybe prices could have risen or interest rates gone up or you may have missed out on what is to be your home forever.
Welcome to the real estate market.
But we are not real estate agents. We do not sell houses. But we can help you with your mortgage and any mortgage or house and contents insurance you may need.
But let’s start with your House Mortgage.
So, you’ve found your home. There has been all the joy, terror, and frustration of actually finding a property, negotiating with the vendor, or bidding at the auction, and then the buyer’s remorse when you finally sign on the dotted line.
But after all that - you own your home
Well, you own about twenty percent of it. For the next 25 to 30 years a bank or some lender owns the rest of it. And ultimately you will be paying quite dearly for the pleasure of homeownership.
We are sure you worked out the total cost that your home will ultimately cost you. You did go to, didn’t you? If you didn’t, we have a link to it on our website. Sorted Mortgage Calculator It is worth a visit.
What will your house really cost you?
As we write this the average house price is $846,900. Now maybe you paid less for yours or more but for this example, we will use the average price. We will also assume you have contributed a 20% deposit of $169,380. So that means you will have a loan of $677,520. Currently, the big 3 banks are offering Variable Loans at around 4.5%.
Let’s see how that works out for you on a 30-year loan.
Total you will pay: $1,235,842
Including interest of:$558,322
So, by the time you own your home (around 2051), you will have paid slightly more than 82% of the actual loan amount and the final cost of your home will be:
Of course, you can get different types of loans (fixed interest, revolving credit, interest-only) but these will mostly give you some short-term relief. Ultimately you will end up either increasing the length of your loan term (and pay even more in interest), have to make higher payments each month (great if you can afford it), or try to refinance it in some way.
What should I do?
Your real goal should be to reduce the length of the loan because, by doing this, you will save on the amount of interest you will pay. But how do you do that?
Banks suggest that you change the frequency of your loan from monthly to fortnightly (that might help – a little!) or make extra payments (good luck with that) but they never tell you how to really pay it off faster without increasing your monthly costs.
How can I save money on mortgage interest?
The truth is you can’t save money on the principal amount you have borrowed. That will need to be paid back.
But you can save money on the amount of interest you pay on that principle. That is why there is so much focus on interest rates going up or down.
So the amount of interest you will pay will depend on the interest rate you are paying and how long it takes to pay off the loan. So getting a better interest rate and reducing the term of the loan and not paying more each month is what you are trying to achieve.
Let’s assume you could reduce the term of your loan without increasing the amount you pay each month. Here is what your home would cost you if you could reduce your loan term to 15 years.
Loan amount: $677,520
Total you will pay: $932,937
Including interest of:$255,417
Let’s put these 30 year and 15 year loans side by side
|Loan Period||Loan Amount||Principal||Interest||Total|
And remember, you have NOT increased your monthly costs to get here. This is costing you the same amount each month as the longer-term loan.
Hang on! The bank never told me about this!
And why would they? After all, they make their profits from you having a loan as long as possible. And those profits are considerable, virtually doubling (tripling or even more depending on the interest rate at the time) the amount they lent to you over the term of the loan.
For most of us we get a mortgage from the bank, forget about it and keep paying every month.
And that is just what your bank wants you to do.
What? Yeah, Right! This sounds a bit dodgy!
Maybe! But it’s not.
Now you may think this is some ‘fly-by-night’ scheme that will use unscrupulous lenders and be a bit illegal. But you would be wrong.
We use all the normal banks (and probably even the bank that holds your mortgage). We simply use the services that the banks already offer and combine them in a way that is more beneficial to you than to the bank.
This can allow you to pay off your loan in up to half the time it would normally take. You can do this without increasing your monthly payments (but if you can it will be even faster).
So what’s the downside?
Of course, there is no such thing as free money. There is always a cost.
To achieve this reduction in your interest costs you use a combination of short to long-term fixed-interest loans, variable loans, cash backs, and, maybe, a revolving credit. This will be adjusted on an annual basis to ensure the best terms and conditions available at the time can be achieved.
And that is where the cost comes in. You need to be thinking about your loan and planning ahead. And if you can do that you will make the savings. Our method requires that you watch your accounts and be proactive in adjusting them.
But we realize that most of us don’t have the time (or inclination) to do this. In fact, just the idea of having to deal with your bank every year is enough to put us off.
And that’s where we come in.
We will set all of this up for you, monitor it yearly, and ensure that you are getting the best deal you can. And, when we organize your loans for you, we do not charge you. That’s right it’s free. Of course, we get paid by the bank for organizing your loan but that is at no cost to you.
Do you have ‘sweetheart’ deals with a particular bank?
Wouldn’t that be nice?
But no, we deal with all the banks. We get them all to quote and then, in discussions with you, decide which will be the best.
And as time goes on we might even change the banks that you are dealing with (only with your permission of course) because the deal is better.
I don’t want to change my bank!
We don’t want you to change your bank because it’s good for us. The only reason we would suggest this is if it will be good for you! And if you really don’t want to change your bank we will work with you to get the best deal we can from them. And, who knows, maybe they are offering the best deal at the time.
But when we suggest a bank change clients can be reluctant to change their banks. They have a long-term relationship with a particular bank and will often say:
"We’ve been with our bank a long time. They’ve always seemed to be fair and understanding”.
That’s great. And these clients are usually been the ones that always pay their bills on time and have never missed a mortgage or credit card payment.
But then we ask them to consider what would happen if they stopped paying their mortgage or credit card bills for 6 months. Did they think their bank would be so nice and kind then? Ask yourself how would your bank react?
The truth is that you are a line in a balance sheet for the bank. Banks are actively discouraging personal engagement with customers. Once upon a time customers got to know their bank manager and formed a relationship with them making getting loans much easier. But now staff are regularly moved between branches and the manager you spoke to last time will not be there now and you will have to go through the same process with the new one and it will be passed to a credit department who also don’t know you. Despite their fancy advertising banks have one purpose - to make money. Nothing wrong with that, of course. But let’s be honest about it and don’t dress the wolf in sheep’s clothing.
And so, like the banks, when our clients realize the amount of money they can make (save) their loyalty to a particular bank goes out the window! Now they are thinking just the way the bank does
Could I do this myself?
Sure. It’s not rocket science. But you will have to do the research on it. Get information from all the lenders. Calculate the best way to structure your borrowings, talk with the banks and then, do it all over again, at least every year.
Or you could talk to us and we will put the proposal together, negotiate with the banks and review your loans regularly.
The choice is yours.