Mortgage rates are falling ... but should you lower your repayments? - Diana Clement

Diana Clement is a freelance journalist who has written a column for the Herald since 2004. Before that, she was personal finance editor for the Sunday Business (now The Business) newspaper in London.

OPINION

With mortgage rates falling, homeowners might be tempted to breathe a financial sigh of relief, and revel in lower repayments. Financially, it makes sense, if possible, to keep paying the same amount you’ve grown used to.

Over the past three and a half years, mortgage repayments have really hurt many people. But most people have found ways to manage and stay afloat.

With these new financial skills honed, it’s time to stop and think before just accepting the lower rates. Overpaying the mortgage directs the extra money to pay down the principal, which starts a snowball effect. The more principal you pay down, the lower the interest charges and the more principal that can be paid off. People who adopt this strategy often pay their mortgages off many years earlier than the 25- or 30-year term.

It’s always a good idea to speak to your bank or a mortgage adviser first in case overpayments incur penalties, otherwise your current financial structure may cost you in the long run.

Mortgage adviser Neville Modlin, of The Lending Team, is recommending clients pause and consider their options.

Not all clients have the cash flow to keep their payments high. Those who do are well-positioned to pay down their mortgage faster. “If you can keep the repayments high and you can do that from a cash-flow perspective that’s awesome. That’s number one.

“Number two is that a lot of people are sitting with savings that aren’t [earning] a good return.” Offset mortgages can save those clients a considerable amount of money. Offset mortgages work by linking or holding your savings within the offset mortgage, which reduces the principal on which interest is being paid.

For example, if you have a $400,000 mortgage and $20,000 in savings, you can link the $20,000 to the mortgage, so you only pay interest on $380,000. The savings are still available if you need them, but in the meantime they are in effect earning a tax-free return at the mortgage interest rate. Some banks allow customers to link accounts from partners or children, not just their own savings.

Then the question of interest rate fixing arises. Not everyone can sleep at night if their mortgage rates aren’t fixed. It might be better for those homeowners to fix their mortgages even if rates are falling.

Many of Modlin’s clients whose existing fixed-rate mortgage periods are ending are simply sitting on the floating rate for now, hoping for even lower rates if they hold on. Floating rates fluctuate over time, but this option works for people who can cope with uncertainty. They are betting that the Reserve Bank of New Zealand will lower the official cash rate this month and again in the new year.

Modlin isn’t entirely in that camp. “It’s quite a dangerous game and I’m conservative,” said Modlin. He recommends clients spread their risk and split their mortgage across six- and 12-month periods. Fixed rates allow for predictable monthly payments, which can be particularly useful if you have a fixed income or value financial certainty.

“That spreads the risk in this uncertain market to take advantage of potentially lower rates in six months.” He added that 12-month rates were not bad currently and helped with certainty.

Jeff Royle, mortgage adviser at iLender, specialises in investment mortgages and has many mum and dad investor clients. For those who can stomach the risk, he recommends they go on to floating mortgages when fixes end for the next month or two and wait for even better rates. A mortgage rate fix will roll over to floating if you do nothing.

Banks are predicting the OCR will drop by 0.5% (50 basis points) on November 27 and have already priced that into their rates. But there could be more falls over the next few months.

“Don’t get sucked in by some of the bank’s so-called specials,” said Royle. “In a month’s time, they may not actually look that special at all.”

Royle accepts that not everyone can stomach floating rates. “If you’ve got multiple properties, you probably need to be a bit more cautious than if you had one.

“Having said that, the fact you’ve got multiple properties would indicate you’re more of a risk taker than a risk-averse person. It would be the flip side to that.”