Using low interest rates to your advantage

We have had low interest rates for a couple of years.  Have you been taking advantage of them to help yourself move forward financially?

Kiwis have a habit of continually upgrading their homes.  In fact we do it every seven years on average.  Instead of rejoicing when our mortgages are either low or paid off and then putting money into saving for our future, we go out and buy a bigger home.

Using low interest rates to your advantage

Sadly when most of us get to retirement our assets comprise of mainly the family home.   Is this smart?  Well I guess it depends on how you look at it.

It may be great to live in a nice house however that needs to be balanced with the lifestyle you can afford in your retirement years if you put most of your money into a home and little into savings.

It seems like NZ will be in a low interest rate environment for a while yet so ideally you want to make the most of it and pay down your home mortgage as much as you can.

Below is a table of the monthly mortgage repayments at various interest rates:

Mortgage Amount                            $200,000        $300,000    $400,000    $500,000
Monthly Repayments @ 8.5%              $1,610        $2,416        $3,220        $4,026
Monthly Repayments @ 7.0%                $1,413        $2,120        $2,827        $3,534
Monthly Repayments @ 5.5%                $1,228        $1,842        $2,456        $3,070

(Standard 25 year term — Principal and Interest Repayments)

It could be really smart to work out your mortgage affordability based on an interest rate of 10% and always keep your repayments at that level.

You would want to make payments at that level on a voluntary basis and keep your mortgage term at the longer length so you have the flexibility to lower them in you need to rather than be forced into those repayments if you formally reduce the term of your loan.

If you did this you would dramatically reduce the term of your mortgage and the amount of money you save in interest will be staggering.

As an example if the interest rate on your mortgage was 5.5% (around market averages at the moment) and you made repayments at even the 8.5% interest level then you would save about 10 years off the timeframe of your mortgage if interest rates stayed at that level.  They will probably rise in the future so you might save say 5 years overall.

It's well worth considering making higher repayments, especially if you don't have any consumer debt that needs to be paid off.