Our top tips that could save you thousands on your mortgage

Housing Market Written by John Bolton, Mar 8 2024
Post by John Bolton - Squirrel Founder

Post by John Bolton - Squirrel Founder

One of the not so awesome truths about homeownership is that over lifetime of your mortgage, on a typical New Zealand house, it’s not uncommon to fork out almost as much in interest payments as towards paying off the house itself.

Makes you feel a bit sick if you think about it too hard, doesn’t it?

You can’t control interest rates, unfortunately, but there are *lots* of things you can control – about how you structure and manage your mortgage – that can save you thousands.

If you’re heading towards a fixed rate rollover any time soon, now’s the perfect time to start thinking about our top tips that could help you get your mortgage working better for you.

1. When you’re choosing a term to fix for, the lowest rate isn’t always best.  

It might feel counterintuitive, but it all comes down to where we’re at the interest rate cycle.

When interest rates are high, you sometimes see longer-term fixed rates (three years and up) drop below shorter-term ones. This sort of curve is usually a good sign that the market thinks interest rates have peaked – and that the next move in rates will be downwards.

So, when you’re feeling the squeeze and every dollar counts, why you wouldn’t you want to fix long-term in this scenario to get a slightly better rate? Because when rates do start to fall again (and it usually happens fast), you’ll still be stuck on that old, higher rate for years to come. And getting out of it is going to be expensive.

The best time to lock in long-term is at the bottom of an interest rate cycle – although picking that is easier said than done, we’re afraid. That’s why it helps to have a friendly adviser at hand who can help you make sense of what the market is doing and where interest rates are likely to head next. 

2. Beware the risk of break fees.

And on the topic of why you shouldn’t fix long-term when interest rates are high – and likely to start falling soon – let’s take a second to talk about break fees.

Break fees are the hefty penalty the banks will sting you with for “breaking” your fixed-term mortgage early, if rates have fallen since you fixed. The calculation goes like:

[The amount interest rates have fallen since you fixed] x [Loan balance] x [Years until the fixed rate matures]

They can set you back tens of thousands of dollars – and the risk (and potential financial pain) is greater the longer you fix for.

3. As a general rule, short-term fixed rates are usually the way to go.

One- and two-year fixed terms are key battlegrounds for the banks when it comes to winning new customers. That means they're usually taking a smaller margin on these rates, and so (generally speaking) you’re getting a better deal than you would on anything three years and over.

In fact, I did the hard yards to work out the “best” term – based on 30 years of historical interest rate data – and found that fixing for a year is pretty much always your best bet.

4. You can make thousands back just by refinancing – and tap into a whole heap of other benefits

If you’ve had your mortgage with your current bank for three or four years (depending on the bank) you’re likely eligible to refinance.

Banks offer great cash-backs on refinancing deals these days – between 0.6% and 1% of your total mortgage value – meaning you could get thousands back in your pocket just by moving your home loan to another lender. On a $600,000 mortgage, that’s a payday of up to $6,000, which (if you want to be really savvy about it) you can then use to make a lump sum payment off your loan.

Taking out a fresh loan with another bank is also a chance to change up other aspects of your loan structure (like extending your loan term or combining a few different loans) to make sure it’s working as well as it can for you.

It’s a bit of a process. You’ll need to go through a full loan application with your new bank, and usually (not always) get a lawyer involved, at a fee of about $1500, but it’s worth the effort.

5. Remember: every extra dollar above the minimum repayment is going to make a difference.

The trick here is to start out small – set your repayments slightly above the minimum to begin with – and then make it a habit to increase what you’re paying whenever you can.

That could look like upping your mortgage repayments by a few percent whenever you get a pay increase at work. Or, when interest rates drop, sticking at (or close to) your old, higher repayments even when you manage to score a better rate.

How you do it doesn’t really matter, but this trick is a powerful one if you stick with it, potentially shaving years off your mortgage and saving you tens of thousands in interest. 

For more detail on these, and to school up on the rest of our eight top tips that could save you thousands on your mortgage, be sure to download our comprehensive refixing and refinancing guide.

The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Squirrel shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Squirrel. We recommend seeking professional investment and/or mortgage advice before taking any action.

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