With the Reserve Bank dropping the OCR by 0.25% and most of the banks reacting immediately by dropping their floating rates we remain in a position of historic low interest rates. Around 80% of people with mortgages now have fixed some or all of their borrowing and likely many of these rates are in the 5% range.

The following graph, from the Reserve Bank, shows rates since 1990. Since 2009 rates have basically been great:

But have they benefitted you? Effectively we are in a ‘golden summer’ of interest rates, the question is have you bothered to plant anything? Is your mortgage being paid off any quicker? What you should be doing is advancing how quickly you are paying down your loan.

Compare someone maintaining the repayments of an 8% interest rate while actually being on a 6% rate since 09 (blue graph) versus just making the usual payments on 30 year term at 6% (grey graph).

The blue graph shows someone, as of May 2009, continued paying at an 8% interest rate payment ($540 a month difference). As at today’s date the 30 year term balance is $372217, the 8% payer has a balance of $307550 a difference of approximately $65000.

If interest rates don’t rise the 8% payer would be freehold in a total of 16 years, or in ten years time from today. Even if interest rates from today went to 8% it would only add another 2 years 9 months on top, so total time of 19 years (represented by the green graph).

The reason that the rise back to 8% does not have that much impact, is the initial savings have catapulted you forward. The early repayments mean all future payments now comprise more principal repayments and less interest which will continue to accelerate how quickly your loan is being paid off.

No one can accurately predict how long these rates will last but you are financially burdening yourself if you do not take advantage of them.

Mike Columbus is a founder of sortmymortgage.co.nz and can be contacted on 03 335 3527 or 021 369908. This article is an extract from; “Sort My Mortgage”(What Your Bank Doesn’t Want You To Know) To get your FREE copy email info@sortmymortgage.co.nz. This advice is of a general nature only and before acting on it please read my disclaimer which can be obtained by emailing me.