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Interest Rate vs Mortgage Term

  • NZHL
  • 28th of May 2015

‘You only know what you know’. Or in terms of a mortgage, you may only know what your lender chooses to reveal. A quick look at a mortgage comparison site, interest.co.nz, and all you see are interest rates. I would love to see a website showing ‘interest saved’ or interest paid, per client. This would give a far greater picture of whether any of the bank lenders active manage their clients, or just give them some lending.

Let’s look at some numbers:

A $450,000 mortgage assuming an average interest rate of 7% means total payments of $1,077,790 and $627,790 in interest, based on a 30 year term.

This same mortgage paid in 20 years would be $837,323 in total payments and $387,323 in interest.

The difference for someone on target to pay it off in 20 years would be $240,000 which averages $12,000 a year. If you could basically have the same job as what you are currently doing, but suddenly get a $12,000 a year pay rise, would you take it? Something presented this way is essentially a no brainer.

Yet because this information is not readily available and few lenders choose to present this people are conditioned to look at interest rates.  Yet the 20 year term would need an interest rate 3.5% higher (10.5%) to have the same interest cost as the 7% 30 year term.

Time with debt and total interest should be the only measures that matter yet these are so rarely discussed or advertised. This lack of discussion is basically costing a new home owner $12,000 a year. Maybe if your lender is not volunteering to discuss this you should insist on it.

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