In our last column we discussed the downward pressure on interest rates. Last Wednesday the Reserve Bank of NZ (RBNZ) cut the Official Cash Rate (OCR) for the first time in over 4 years taking it from 5.50% down to 5.25%.
This was quite the U-turn, as back in May the RBNZ was debating whether to increase the OCR and stated that they intended to keep the OCR at 5.50% until August 2025 (no one believed that). Now the RBNZ is saying that they’re intending to make at least 1 more cut this year but likely 2 more cuts.
Mortgage interest rates are starting to come down. As mentioned in our last column, understanding the best fixed rate option for you is very important at this point. Banks are making their biggest rate cuts on the longer term fixed rates, but make sure you look closely at the numbers before committing to a long term fixed rate in this environment.
As rates come down, anyone with a mortgage has an opportunity to pay down their mortgage at a faster pace.
If you’ve already moved off one of the historically low mortgage rates in the 2’s and 3’s and onto a rate in the 7’s or high 6’s, as you move off these higher rates and into a new slightly lower rate, if you keep your payments at the same higher level as when the rate was higher you can make a good dent in your mortgage balance. Of course for many people, the relief of lower rates and repayments will be very welcome, but if you’ve comfortably been able to manage payments at the higher rates, keeping your payments at their current level when your rate drops will pay off.
Let’s look at a $500,000 mortgage that’s been on 7.25% and is now going onto a new rate of 6.85% and is being repaid over a 30 year period. The payment at 7.25% is $786/week. The new minimum payment at 6.85% would be $755/week. That’s a difference of $31/week. If you went onto the new minimum payment, that $31/week payment reduction could be swallowed up pretty quickly by one visit to the bakery with the kids, amongst countless other things!
If you kept the payment at the $786/week that you had been paying, that would get you onto the trajectory of repaying in 27 years as opposed to 30, shaving 3 years off your repayment period. That would also see you on course to save $93,440 in interest costs over the life of the mortgage. All for a measly $31/week!
As the rates continue to fall, the repayment time, and interest cost savings would get better and better if your payments were kept at the original level.
Let’s go Raglan – take advantage of the falling rates to get your debt repaid quickly and get on track to a secure financial future.
