By Justin Hayward
Last week Dr Bollard released his Monetary Policy Statement, confirming that there will be no changes to the OCR this month. However, from his comments we can assume that we are likely to see rate increases around the end of the year or early next year. There are no surprises there. However there has been a raft of commentary come from the side-lines about what Dr Bollard should or shouldn’t do. For you and me, the only real thing we should be concerned about is when do we fix our mortgage interest rates?
This debate will be on-going. Do we try to ride the floating rate as long as we can, knowing that in the background fixed interest rates are likely to trend up? Do we fix our interest rate now, and forgo the relatively cheap floating rates currently on offer? I think the real answer lies in your own risk appetite and your regular budget. From my opinion, I would suggest that the answer to these questions lies in can you afford a sudden increase in your mortgage repayments?
Repaying your mortgage takes perseverance, commitment and tenacity. It involves regularly budgeting money to pay against the loan, in an effort to reduce the amount owed, until you don’t owe anything anymore. I recently heard some great advice that I thought was worth sharing. Don’t try to double your regular loan payment amount, just try to double the principal component of the loan. Then you will about halve the term of your loan.
You will probably find if you look at your loan statements from the bank that the amount of principal repaid to the bank each month is quite small. Especially if you have only taken your loan out recently. If you’re near the end of your loan term, then it will be quite the opposite. So when you subtract the interest component from the amount that you have paid for the month, then you may well find that you can quite easily pay this amount into your loan account. The net result? Probably not much every month. Over the lifetime of a loan – potentially enormous!
However returning to my comment earlier, if your regular loan payment suddenly increases, are you going to be in a position to put additional funds against the principal reduction of your loan? It is likely if the interest rate increases, then these principal increases you can budget for, suddenly become interest repayments. If you aren’t in a position to budget for additional payments, what position will you be left in?
Another argument to consider when deciding to fix or float? Remembering that a bank will limit the amount of your loan ‘prepayments’ to around $10,000 or 5% of the loan amount (whichever is smaller) on a fixed loan, you will need to calculate how much you can afford to pay over the next year or so, before you fix. I also suggest you check this with your bank (or broker) for the exact amount. If you choose a floating interest rate, then you can pay as much back as you like … so long as it is above the minimum required by the bank.
So do you want to repay your loan as fast as you are able? Do you need to consider your budget does not allow for variation from month to month? These are the two big questions I feel that you should ask yourself when you consider the age old question of fixing versus floating interest rates. From my experience, those who try to ‘pick the market’ often come unstuck, and end up paying a higher interest rate than those who plan around their budget.
Think local and work to your own schedule. The big goal to remember with your home loan is that it is for the purchase of your home! Keep it safe and secure as you would your own family. Budget carefully and good luck in the management of your home loan. If you have any questions, or would like some advice, please feel free to call me.
