Fixed mortgage interest rates are dangerous because it is so easy to focus on the current fixed rates and not plan your mortgage through time. The crux to saving large sums on your mortgage is:
The amount of interest you pay through time is far more important than the mortgage interest rate you pay at any point in time.
Think about it another way – the fixed rate term you choose will determine the next point in time that you can choose a rate, so your decision now has impact on your future interest rate.
Mortgage Advice
Chances are you will end up paying your mortgage for at least 20 years of your working life making it one of your biggest financial investments. Allowing for interest, you will end up paying back 2x the amount you borrow. So it is important that your mortgage is structured correctly from the start and that you get good advice.
Most bankers are trained on how to process a mortgage through the system (computer says “no.”) They are not qualified to give advice. It is safe to assume that in most instances they do not know anymore than you when it comes to interest rates.
Save $80,000
Homeowners are typically very poor at managing their mortgages and “guessing” interest rates. From what we’ve seen we think the cost over the life of a mortgage is around $80,000. That $80,000 is from poor rate choices. You could add another $80,000 for homeowners who do not put discipline around paying their mortgage off quickly.
Background
The $80,000 cost is based on a sample of 1,500 actual mortgage reviews we did over the past 6 months. All you really need to know is that the $80,000 is based on real observations.
Here’s the detail if you are interested …
The Reviews gave us the chance to see what sort of advice people are getting out there. We took a sample and went through and scored each deal out of 5. The results of this were shown in an earlier blog - How good is your bank on mortgage advice?
The graph below shows the % of each bank’s customers in the sample that scored the worst possible score of “5.” To get a 5 they had to have put their entire mortgage on a 3-7 year fixed rate during 2008. Typically the people that were doing this were chasing the lowest rate, hence why BNZ and Kiwi Bank scored worst.
The cost of poor mortgage advice is somewhat invisible because most people are unaware of how much interest they pay on their mortgage through time. They tend to simply focus on the mortgage rate at any point in time.
So we decided to go a step further and calculate out the cost of this poor mortgage advice.
We used a second sample of 115 mortgage reviews where customers had fixed their mortgage during 2008. We then calculated the additional interest customers will pay (relative to current rates) until their fixed rate matures.
On average the additional interest cost ended up equivalent to 5.52% of the mortgage balance, or $18,000. It ranged from 4.36% of the mortgage balance at the best bank to 7.06% ($23,000) at the worst.
In comparison, a sample of Squirrel arranged mortgages for 2008 came out at 3.5%. That is (a) not perfect but (b) 36% better than the bank average.
The graph and table below show the impact of a 0.50% improvement in the interest rate over the life of a mortgage (keeping the regular repayment amount the same.) What it shows is that 0.50% over the life of a mortgage equates to a saving of $84,000 in interest.
Who Are We?
Squirrel is an independent Mortgage Broking and Advisory business. We are happy to help you get the best out of your mortgages whether that is buying property, refinancing or simply restructuring everything to make it work better. Have you thought about doing a mortgage review of your current mortgage. If you are buying a new home then you can apply online with us and we’ll save you a bucket load of money, time and stress.
