What to consider when choosing your mortgage rate

It’s the Kiwi obsession, what rate are you getting, is someone else cheaper, etc ad nauseam. And because rates have trended down till now (which will end at some point) people are more and more obsessed with how low they can go.

Here are some of my thoughts on what to look at.

1.            Don’t jump for no good reason

2.            Look at the cost of the borrowing, not the rate

3.            Be clear about your timeframe, don’t get sucked into the rate

Don’t jump for no good reason

Too many people are simply looking at price and have an assumption that they will be able to jump to a new bank on some amazing new rate that the existing bank cannot match. Now sometimes a different bank is cheaper than your current one, as their special might be lower and your bank has not matched. But we are not talking half a percent here, it would be .1 or .2 at the most. You also don’t know if when this comes up again, if you need to move back.

You also take a risk that by having your entire loan coming up at once, that the saving you are making is against an overall higher rate. So, unless the service sucks, or there is a new product you want that your one does not have, don’t focus on jumping ship. The banks are starting to track this and if you are a serial jumper you may get caught out one day.

Look at the cost of the borrowing, not the rate

By focusing purely to the rate, you keep paying the bank long term, and will end up paying more over time. But if you focus to how much more you can pay back and try to get rid of the loan faster, the actual rate won’t matter (as above, there is little difference between most lenders) as you will save a lot more money than the rate saving.

Be clear about your timeframe, don’t get sucked into the rate

If the longest rate was the cheapest and rates never changed, we would always fix for 5 years, but it’s not. Most Kiwis fix for 2 years and the rates are generally set up so that the 2 year is the cheaper fixed rate (which is why most people choose it). But what is your plan in 2 years? If you are having a child, or moving, or have a big trip planned, or something that will cause financial upheaval why would you also want the risk of mortgage rate increase? Locking in for longer (or shorter) to give stability during a rough year is a good idea. Also, if you have uncertain income a longer fixed period (which may not be as cheap on paper) may save you more in the long run. If you have a $400 000 mortgage (low end these days) a 1% jump is $4000 a year in extra interest, or a bit under $80 a week. With rates in the mid 3s right now, there are a lot of 1% increases we could have to get back to where rates were not much more than 10 years ago.

So, in summary, don’t get distracted by the flash, focus to the big picture, and have a plan. Look at the cost not the price of your mortgage.