Debt levels drop

By Susan Edmunds

Householders are paying mortgages quicker, thanks to low interest rates.

Alex and Tracy Wallace are paying their mortgage faster. Photo / Getty Images
Alex and Tracy Wallace are paying their mortgage faster. Photo / Getty Images

More than a quarter of the country's home loan borrowers are paying off their mortgages faster than they have to because of historic low interest rates.

Home loan interest rates continue to be the lowest they have been for almost 50 years, and borrowers are taking the opportunity to knock chunks off their mortgages.

Westpac said 33 per cent of its customers were more than 30 days ahead of the minimum repayment required from them.

Kiwibank said about 25 per cent of its borrowers were paying off their loans more quickly than when they set up their mortgages.

Offset loans - whereby customers' savings and other bank accounts are offset against their borrowing to reduce the interest charged - are increasingly popular. Kiwibank said about 25 per cent of its loan business was in offset loans.

BNZ said more than 65 per cent of its clients had opted for increased repayments, the bank's rapid repay - a revolving credit option - or Total Money, the offset offering.

ASB said the number of extra payments being made on a regular basis was significant.

Dr Claire Matthews, of Massey University's centre for banking studies, said it was good news that people were paying more on their loans.

She said new homeowners would notice a big difference even from small extra repayments, because so little of the initial mortgage payments are principal. A person paying an extra $25 a fortnight could be paying off twice as much of the principal.

"You don't have to make much of an extra payment to make a big impact."

Kerri Thompson, ANZ managing director for retail, agreed. "If a couple with a $300,000 mortgage on a 25-year term, who spend $4 a day each on their daily coffee, divert those funds to their loan, they could save up to five years off their home loan and up to $65,000 in interest."

Matthews said paying more now would mean that when rates did inch back up, the pain would not be as sharp.

NZ Home Loans puts its customers on to revolving credit-style home loan products that encourage them to pay off their loans more quickly. Chief executive Mark Collins said low interest rates were helping customers pay their principal faster. "We always say 'live as if the interest rates were at a higher level'."

Business has been growing quickly - customer numbers were up about 15 per cent on last year, which in turn was up on the year before.

Collins said of the company's $2 billion loan book, customers had paid off $22 million more than they would on standard loan terms.

Reserve Bank statistics show that household debt as a percentage of nominal disposable income is at a six-and-a-half year low.


Years slashed off payments

Alex and Tracy Wallace are knocking down their mortgage while interest rates are low with a revolving credit facility from NZ Home Loans.

They bought their house in Mt Roskill a year ago. A revolving credit facility can reduce a loan's term because the borrower puts all of their income into their home loan each month, reducing the balance and interest charged.

Even if they pull their income out at the end of the month to pay bills, less interest has accrued.

The Wallace family had been on a 30-year loan term but by restructuring it and trying to pay it off faster, they have taken 11 years off that time.

Alex said trying to reduce the loan substantially now meant that if interest rates were to go up in future, the impact would be less painful.

- Herald on Sunday

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