As someone who is usually always questioned on interest rate I want to illustrate why it is never that simple using a single point of reference for a mortgage. I’ll illustrate it with Smith vs Smyth.

The Smiths are good negotiators and drive a hard bargain with their bank, meaning they get 0.6% off the interest rate at any point in time. So if I use an interest rate of 6.5% as a long term average, their rate is 5.9%. The Smyths on the other hand understand that having a good loan structure is important. They prioritise this and set-up their loan in a way to utilise their income to attack their interest rate.

They both start with a $400,000 mortgage with a monthly payment of $2528 at 6.5%.

The Smiths get their lower interest rate of 5.9% and use the interest savings, $155 a month, as extra repayments, meaning they still pay $2528 a month but this consists of an extra $155 a month on top of the required minimum payment. End result is paying off their mortgage over 4 years faster and saving $134,000 in interest.

The Smyths have their loan structure utilising all their income as well as having a surplus of $100 a month, which is automatically used to reduce some of their interest cost. Their end result is paying off their mortgage 9.5 years earlier and saving $165,000 in interest, despite having a higher interest rate.

Now if the Smyths also secured an interest rate discount of 0.6% and kept their loan structure they would pay off their mortgage 11 years faster and save $232,000 in interest.

Questioning interest rates is relevant, but the more costly mistake is not getting a good loan structure which is proven most effective for paying off your mortgage faster.

The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans.