The 'hack' that could save young homeowners thousands

Lifestyle Written by John Bolton, Nov 14 2018

Feel like you’re missing out on a good mortgage rate? If you only recently bought your first home, you’re not alone. This hack could save you thousands of dollars in interest.

Owning your first home, many of you will have less than 20 percent equity (in other words, you’re borrowing more than 80% of what you bought the house for). In that case, chances are you’re paying for that in the form of higher mortgage rates because when you purchase a house with less than a 20 percent deposit, banks will give you their standard mortgage rates. They’re the rates you see advertised which aren’t overly competitive, plus you likely have what’s called a ‘low equity margin’ of half a percent added on top of that. Sounding familiar?

Since you took out your mortgage, interest rates have fallen and that will make those high rates hurt that bit more!

Are you paying a rate over 5.00%?

If you are, then you are paying a high rate in a market where borrowers who have paid off more than 20 percent of their house are able to get rates as low as 3.95%. To put it in context, on a $600,000 mortgage that’s paying an extra $7,800 in interest every year.

Here’s a look at the difference between what interest rates you might be on, versus ‘special’ rates from the banks at the moment:

 

Difference between low equity and 20% equity interest rates

Rates as of the 14th November 2018. Subject to change.

Want to know how you can get around it?

A clever client of ours came up with this ‘hack’ by using our Homeowner’s Loan to save himself heaps, as you’ll see below.

But first, I need to explain our Homeowner’s Loan. This loan is without question the best personal loan in New Zealand. As the name suggests, it’s designed especially for homeowners.

It has no fees, yes no fees, and a low interest rate of 7.95% for the first year which you pay interest-only to keep repayments minimal. (You’ve just taken on a mortgage, you don’t want to be squeezing your pockets much more right now). After the first year it can be put back on the mortgage, or it can be paid off as a standalone loan on a rate of 9.95% over seven years. The loan can be repaid as fast as you like or in full at any time at no cost.

Back to the hack. Our client borrowed $49,000 on a homeowner’s loan and then used it to pay down his mortgage below 80%. Simple, right!

Here's an example

In the table below you can see the "Do nothing scenario" which is a typical recent first mortgage. Below that is what we're suggesting: your mortgage at a much better rate, plus the Homeowner's Loan which helped you get the low rate. Compare the two scenarios, added and see the sweet savings in interest.

 

Mortgage repayment and interest differences table

The client saved $5,274 in the first year alone by getting on to a much lower rate. That’s approximately $100 per week.

In reality, the client would have sat above 80% for at least a further five years, especially with soft house prices not helping the value of his house. With this simple hack, he is now likely to save himself around $34,000 give or take, over the next five years. 

What makes this even more unique is that with Squirrel we'll not only arrange the Homeowner's Loan but one of our experienced Mortgage Advisers will approach the bank on your behalf to get you the most competitive rate. We can walk you through the entire process, including adding your Homeowner's Loan onto the mortgage after the first year if that's what you want.

Every situation is different. We'd be happy to chat through your current situation to figure out the best solution for you. Get in contact today or complete our online application and someone will be in touch with next steps.

If you are not sure how much you can borrow or what your repayments would be, let our mortgage calculators calculate this for you.

Read our Loan Agreements for Homeowners:

CTA - get onto a better mortgage rate

We can help. Have a chat to one of our advisers.