Get Sorted: Anchors away

Anchoring is when we mentally latch on to a specific payment in our heads and we won't budge. Photo / Thinkstock

We get hooked on less-important costs – they loom larger in our minds than they really should.

Last week I found myself at a local car yard, trying not to get distracted by knobby-tyred Jeeps. I was talking shop with the business manager in the glass-walled back office whose job it is to get folks to seal the deals.

Surprisingly, she and I encounter essentially the same problem: people who mentally latch on to a specific payment in their heads - what's known as "anchoring". Once they get a car price in their heads that they feel works, there's no budging them. They want that deal... at all costs.

The difference is, in her case she'd like to increase their payments in order to sell them add-ons like insurance or protective car coatings. In mine, I'm trying to budge people to make higher repayments in order to save themselves a pile of interest!

Anchoring happens with mortgages, too. What are the numbers that our minds latch on to? There are probably three that we hear in our heads: the house price, the interest rate and especially the minimum payment. That last one blares particularly loud - once we set our minds on a payment we think we can handle, we'll move heaven and earth (and whanau) to make it happen.

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But is it a good deal? Is it the best way to borrow?

Top 3 when you're shopping for a mortgage

If you are going to anchor onto anything when you compare mortgages, here are the three numbers that should be top of mind:

• The lifetime cost of the mortgage
• The house price
• Any penalty clauses, especially those that kick in if you pay more than the minimum

Back at the car yard, my finance friend's solution is to quote a higher price at first so she can still sell people insurance without edging their car payments any higher than they already expect.

With mortgages, I'd say plugging in higher repayment amounts into this calculator will show you how much you could pay... and how much interest you can save.

Weigh anchor and sail!

Get Sorted is written by Sorted's resident blogger, Tom Hartmann. Check out the guides and calculators at Sorted - brought to you by the Commission for Financial Capability - at sorted.org.nz.