Pay Off Mortgages Faster by Finding the Best Home Loan Rates

For many people, buying their own home is a long-held goal that they must achieve. There are plenty of benefits of home ownership: it can be a great form of enforced saving, can protect you from rising rental costs and, if it’s well chosen, having your own home should provide you with an asset that increases in value.

For many, shopping for a home can be an emotional experience. When you start shopping for the accompanying mortgage and looking around for the best mortgage rates, though, put that emotion aside. All that stands between you and a way to paying off your mortgage faster might be some tough negotiation skills!

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How much does a mortgage really cost?

Many Kiwis just simply pay their mortgage every month without ever thinking of how they could be getting a more affordable home loan in the long run.

You spend the time making mortgage comparisons, so you can get the best rate, so why not take a few steps to reduce your repayments?

Financially-savvy home owners treat saving money on their mortgage as a contact sport.

The exact cost of a mortgage will, of course, vary from person to person. But it is likely to be the biggest debt you will ever have – even after your dedicated search to find the best mortgage rates! So, it’s worth knowing just how much interest you could pay over the life of the loan. As an example (and please note that the below calculations are indicative only):

Interest on a $300,000 loan at 5.6% over 25 years

Loan $ $300,000
Term of loan 25 years
Interest rate 5.60%
Monthly repayment $1,860
Total Repayment $558,066
Total amount of interest paid $258,066
Interest rate based on current average floating home loan rate on CANSTAR database

So, your dream $300,000 home might actually cost you more than $550,000 over the life of your mortgage. That’s assuming our currently-low interest rates remain; if rates were to rise by two percent, the $300,000 mortgage could cost the following:

Interest on a $300,000 loan at 7.6% over 25 years

Loan $ $300,000
Term of loan 25 years
Interest rate 7.60%
Monthly repayment $2,236
Total Repayment $670,957
Total amount of interest paid $370,957

How do I pay off my mortgage faster?

Paying off your mortgage faster takes a combination of shopping around for your ideal mortgage rates and learning a few simple strategies. There is no point in paying more out of your hard-earned money than you need to.  In all the strategies outlined below, we use as the comparison point our original example of a $300,000 mortgage over 25 years at a rate of 5.60%.

How do I negotiate for best mortgage rates?

 Mitchell Watson - CANSTAR
“A good start for home loan negotiations to compare current mortgage rates, so you can go into negotiations with the advantage of knowing what the market is doing.”
– CANSTAR’s Research Manager Mitchell Watson

To negotiate with financial institutions for best mortgage rates, first remember that they do want your business and some are prepared to reduce their rate in order to attract you. A good start is to compare current mortgage rates, so you can go into negotiations with the advantage of knowing what the market is doing.

With a wealth of online comparison tools (you can check our home loan rates), consumers are more empowered than ever.

So do some research, find a product that has the features you need for an attractive home loan rate and phone your financial institution to see whether they can match it. How much could you potentially save? Plenty! Even an interest rate reduction of 0.4% – from 5.60% to 5.20% – could potentially save you the following:

Interest on a $300,000 home loan at 5.20% over 25 years

Loan $ $300,000
Term of loan 25 years
Interest rate 5.20%
Monthly repayment $1,788
Total Repayment $536,671
Total amount of interest paid $236,671
Interest saving compared to original $21,395

Simply doing some online research and making a phone call could potentially net you a discount – and a nice cash saving!

What can negotiating a lower home loan interest rate do?

Negotiating a lower interest rate and maintaining your monthly repayments at their previous level can save you even more. In our original example, negotiating a 0.4% reduction in interest rate, but maintaining repayments at $1,860 per month would look as follows.

$300,000 home loan at 5.2% over 25 years

Loan $ $300,000
Term of loan 25 years
Interest rate 5.20%
Monthly repayment $1,860
Total Repayment $516,632
Total amount of interest paid $216,632
Interest saving compared to original $41,434

Another added bonus of this strategy is that your mortgage can potentially be paid off almost two years earlier!

Another strategy: Increase frequency of mortgage repayments

Another fantastic cost-saving strategy is to increase your regular mortgage repayments. While it can be easier said than done for some households, making an effort to find some extra spare cash for your mortgage each month can reap big rewards. An extra $100 per month payment, for example, could do the following:

$300,000 Home Loan at 5.6% over 25 years

Loan $ $300,000
Term of loan 25 years
Interest rate 5.60%
Monthly repayment $1,960
Total Repayment $527,387
Total amount of interest paid $227,387
Interest saving compared to original $30,679

So simply repaying an extra $100 per month could potentially save you over thirty-four thousand dollars in interest repayments. Plus as a bonus, your mortgage is paid off four years earlier!

Another strategy: Do both: reduce your interest rate, increase repayments

The nirvana of strategies is to negotiate the best home loan rate AND increase your monthly repayments. Using our examples above, this could potentially reduce your loan interest costs by more than sixty thousand dollars and show you how to pay off your mortgage much quicker – even by as much as four years. That could be a luxury around-the-world trip for the family – as well as the time to do it!

$300,000 home loan at 5.2% over 25 years

With increased repayments and reduced interest rate

Loan $ $300,000
Term of loan 25 years
Interest rate 5.20%
Monthly repayment $1,960
Total Repayment $493,385
Total amount of interest paid $193,385
Interest saving compared to original $64,681

Another strategy: Pay occasional lump sums off your home loan

Even if your budget simply can’t support extra regular payments, paying occasional ad hoc payments, will provide another way to pay off your mortgage faster. Put a tax refund, for example, or a work bonus to good use– every extra payment helps.

As an example, $3,000 lump sum payments every five years could make the following difference to our original example:

Loan $ $300,000
Term of loan 25 years
Interest rate 5.60%
Monthly repayment $1,860*
Total Repayment $565,898
Total amount of interest paid $265,898
Total Interest Saving $13,973

*Plus three extra one-off $3,000 lump sums

Any other ways to save on my mortgage?

There are plenty of other ways to save on your mortgage. Changing your repayment frequency from monthly to fortnightly, keeping your repayments the same when interest rates decrease and  increasing your repayments each year as your salary goes up will all make a difference. Some extra tips:

  • Pay fortnightly. There are 12 months in a year, but 52 weeks. If a home owner pays half of the monthly mortgage payment fortnightly, that equals the equivalent of one month extra each year. This is a painless way to pay more.
  • Reduce the term. Most people sign up for 25 year mortgages. Yet by paying over a shorter period, the interest component is reduced. That’s because larger monthly payments whittle away at the capital at a faster rate – providing it’s a capital and interest mortgage.
  • Change lenders. It can save money to shop around for a better interest rate or change to a different product with the same lender. It’s worth speaking to the existing lender first in case there is a better deal and to ascertain if there are any break or discharge fees. It’s important to factor in any legal fees and establishment fees to set up a new mortgage.
  • Get a reducing mortgage. Reducing mortgages are similar to table mortgages, which most people on capital interest are paying. With a table mortgage, the initial monthly payments are mostly interest with a small amount of capital. As the capital is paid off, the interest portion drops and the capital repayment goes up. With a reducing mortgage home owners pay an equal amount of capital each month, which means the capital is paid off faster. The initial repayments are more than a table mortgage.

Recap: Ways to cut costs on your mortgage

Increase the frequency of repayments Making mortgage payments fortnightly rather than monthly, with 52 weeks in a year but only 12 months, this can help you get a cheaper home loan in the long run.
Increase the level of repayments Consider dedicating any pay rises or tax refunds to an increase in mortgage repayments, it’ll pay off in the long run.
Reduce the home loan term Paying the home loan over a shorter period of time reduces the compound interest of the loan.
Shop around for best-value home loan you can get Compare home loan providers, negotiate for a lower rate or change lenders if they have the best home loan rate for you.

It may be worth getting independent legal and financial advice before making changes to your mortgage. For example, an inheritance is separate property under the Property (Relationships) Act, unless applied to joint expenditure such as a mortgage.

The single thing that will make the biggest difference of all, though, is making a change right now. So, what are you waiting for?

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