Unfortunately, there’s no secret formula to reducing the cost of a home loan. Three things affect the overall cost of a mortgage:
- Size of the loan
- Interest rate
- Mortgage term
And there’s only one surefire way to reduce interest costs: repay more of your loan, and faster! But if you’re experiencing financial hardship, there are ways to reduce your monthly repayments, although they are likely to add to the cost of the loan in the long term.
Here Canstar runs through six ways to reduce mortgage repayments:
1 Shop around for the lowest rates
If your loan is up for refinancing, shop around for a better deal.
Many people who fixed for two years at the mortgage market’s low two years ago are now facing much higher rates. Back in 2021, the average two-year fixed rate on Canstar’s database was 2.96%. Now it’s more than double that: 7.18%.
However, there’s still a big discrepancy between the lowest and highest rates in the market. We’ve crunched the numbers on some of the rates currently on our database. And, as you can see from the below grid, depending on the mortgage rate and its fixed term, there’s a big difference between the lowest ($4016) and highest ($5022) monthly repayments: $1006!
NZ Median House Price Mortgage Repayments
Loan amount: $636,000, based on 80% of the median NZ house price of $795,000:
|1 Year Fixed||6.79%||7.47%||8.79%|
|2 Year Fixed||6.59%||7.18%||8.49%|
|3 Year Fixed||6.49%||6.96%||8.25%|
|1 Year Fixed||$4142||$4434||$5022|
|2 Year Fixed||$4058||$4308||$4886|
|3 Year Fixed||$4016||$4214||$4778|
Source: www.canstar.co.nz – 17/11/2023. Median house price based on the REINZ Monthly Property Report (October 2023). Interest rates based on owner occupier fixed home loans on Canstar’s database, based on an 80% LVR and principal & interest repayments. Monthly repayment and interest calculations based on principal & interest repayments made over a total loan term of 30 years.
Shopping for the lowest rates: what to consider
When shopping around for a new loan, always:
- Research current rates. Canstar’s comparison tables are a great place to start
- Don’t be afraid to ask your lender for a better rate
- Be prepared to switch banks (and use this as leverage with your current lender)
However, when switching lenders, do watch out for any establishment fees and solicitor costs involved, and factor these into your calculations. The paperwork involved with refinancing a mortgage with a new lender can cost up to $2500. However, these fees are often negotiable and, currently, some lenders are offering thousands of dollars in cashbacks for new customers.
2 Don’t pay lenders mortgage insurance
Lenders mortgage insurance (LMI) is a interest premium charged by lenders to homeowners who buy a property with a deposit of less than 20%. It can range from an extra 0.25% to 1.5% per annum.
Once a homeowner’s equity in their home reaches the 20% threshold, they no longer have to pay the LMI. However, the kicker is that banks don’t actively revise the LMIs paid by their customers – it’s up to the mortgage holder to ask for a re-evaluation.
So, if you bought a home with a less than 20% deposit, but are now sure you have more than 20% equity in your home and are still paying the extra mortgage rate, get in touch with your lender immediately. It could help reduce your mortgage repayments.
3 Use an offset account
If you have lump sums sitting in savings or term deposit accounts, or have steady cash flow through your current account, it could be worth considering switching part of your mortgage to an offset account, or a revolving line of credit account.
Both these types of accounts deduct sums sitting in your bank accounts from the total owing on your mortgage, while still giving you ready access to your money. For example, if you have a mortgage of $400,000, plus $50,000 in a linked offset account, you will only pay interest on $350,000 of your loan balance while the $50,000 is in the offset account.
However, it’s important to note that these types of accounts come with floating rates, which are usually at least 1% higher than fixed rates. So for an offset to work to your advantage, you must ensure that you usually have enough funds in your account(s) to cover the offset portion of your mortgage.
For more details on these types of accounts, read our story Offset Mortgage or a Revolving Credit Account: Which is Better?
4 Lengthen your loan period
If you are facing unaffordable mortgage repayments in the current high-interest rate environment, one option come refinance time is to discuss a longer loan period with your lender. However, while this can help reduce your monthly repayments, it will increase the overall cost of your loan, so is only a short-term solution to a financial squeeze.
Also, if you are only at the start of a long-term loan term, for example with 25 to 30 years still left on your mortgage, you won’t have much room to manoeuvre. But if you’ve 15 years left on a $300,000 mortgage, by extending your term to 20 years, your savings could look like this:
Repayments on $300,000 mortgage at current average 1 Year rate of 7.47% p.a.
- Monthly repayments on 15-year term: $2776 (total interest over 15 year term: $199,667)
- Monthly repayments on 20-year term: $2411 (total interest over 20 year term: $278,707)
However, as you can see, for the sake of short-term savings, if you don’t refinance your mortgage back to its original term length once your finances improve, you will end up paying far more interest over the life of the loan.
5 Switch to interest-only repayments
Banks are usually pretty reluctant to allow owner-occupiers to move their home loans to interest-only mortgages. If you can’t afford your mortgage, they’d prefer that you sold up and bought a more affordable home.
However, as a short-term solution, for example if you’re experiencing a brief period of downtime between jobs, or due to unpaid maternity or paternity leave, it could be worth considering. A bank will be far more agreeable to you switching to an interest-only loan if there is a fixed end in sight.
Also note that as with extending your loan term, switching to interest-only is only going to cost you more in the long term, because:
- As you’re not paying anything towards the loan principal, the total interest paid over the life of the loan will increase
- Rates on interest-only loans are higher than principal and interest loans
- You’re not building any equity in your home while you’re only paying off the interest
6 Pause Your Mortgage Repayments
If you’re struggling to make repayments, as a last resort, you can always talk to your lender about entering a financial hardship arrangement and pausing your mortgage repayments temporarily while you get back on your feet.
Obviously, this is not an idea solution. Not only will you not reduce your loan principal, you will continue to be charged interest on the loan, which in turn will start to accrue compound interest charges.
However, if you’re experiencing temporary troubles that impact your income – for example a job loss, accident or illness – a repayment pause gives you a beathing space, and time to find a long-term solution to your financial problems.
Ultimately, if you are having trouble meeting your mortgage commitments, talk to your lender at the earliest opportunity. Ignoring a financial problem never makes it go away.
Compare with Canstar for the Cheapest Mortgage Rates
But while the cheapest interest rates are important. When looking for the best mortgage, you do need to look at more than just interest charges. When Canstar compares and rates mortgages and mortgage lenders, our expert researchers look at each home loan and awards points for the array of features it offers and its comparative price, which includes rates and fees.
The best products then receive our 5-Star Ratings for Outstanding Value. We place a lot of importance on our ratings, which is why the comparison grids below are sorted first by Star Rating, highest to lowest. However, if you want to compare by lowest rates instead, just click through to access our full mortgage rate comparison tables.
Best Mortgage Rates for Refinancing
The table below displays some of the 2-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for home owners looking to refinance. This table is sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.
About the author of this page
This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.
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