Interest rates are typically the first point of discussion on a mortgage, at face value they are easy to understand, a lower rate is better than a high rate and so easy to make a decision on. However mortgages are more complex than just the interest rate and relying on this single portion for making a decision is potentially a costly mistake.
Rate of repayments and total interest cost are far more important factors to consider in a mortgage but as they are more complex to calculate it seems not many lenders chose to mention them.
Let’s look at 3 scenarios – I’ll use a $350,000 mortgage based on a 6% interest rate and 30 year term.
The 3 scenarios are:
- Low interest rate; use 5% instead of 6%
- Shorter mortgage term; 25 year term instead of 30 year term.
- Effective structure – use income to offset some of the interest cost of the mortgage.
| Low rate | 25 yr term | loan structure | |
| Interest rate | 5% | 6% | 6% |
| Loan Term | 30 years | 25 years | 22 years |
| Total interest paid | $326,395 | $297,982 | $263,819 |
As the table shows, the lowest interest rate is actually the costliest mortgage to have. Being able to offset some of the interest costs and shorten the term are far more important. Once these are in place then getting a good interest rate helps. Prior to that you are probably costing your self.
For most mortgages people will be making up somewhere from $700,000 to $1,000,000 in total payments, it’s worth understanding that there is more to a mortgage than just the interest rate.
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.
