How half of home loan borrowers use fixed interest rates to succeed

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We're locked up again.  The first lockdown last year saw mortgage interest rates fall to their lowest level.  Half of all households took advantage of not reducing payments, which should shorten their home loans by years and save them a small fortune in interest.

JOHN KIRK-ANDERSON / Miscellaneous

We’re locked up again. The first lockdown last year saw mortgage interest rates fall to their lowest level. Half of all households took advantage of not reducing payments, which should shorten the duration of their home loans by years and save them a small fortune in interest.

The shocking financial wake-up call experienced by households during the first nationwide Covid lockdown has led to a sharp increase in the number of people “promoting” their home loans.

The Bankers’ Association of New Zealand says that half of all people with home loans chose to set payments above the minimum required the last time they reorganized part of their loans.

This would allow them to reduce the number of years it takes to pay off loans and reduce their lifetime interest expenses.

“Our data shows that 50% of mortgage customers outpace repayments,” said CEO Roger Beaumont.

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“This says a lot about the financial capabilities of people with mortgages. They think it’s a good idea to pay off the loan faster if possible. “

Home loan interest rates fell to historically low levels in 2020 as the Reserve Bank cut its official money rate to bolster the economy in the face of the Covid-19 pandemic.

“The historically low interest rates we have faced over the past few years have also influenced borrowers to be able to repay their loans faster,” Beaumont said.

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“Depending on the type of loan, borrowers often choose to maintain their level of payments in the event of a decline in interest rates.”

Mortgage broker Bruce Patten said more than half of his clients chose to pay off their loans above the minimum.

“We encourage everyone to do this,” he said.

He gave the example of a customer who will now pay her home loan in 12 years. When she took it out, she hoped to have it cleaned by 2044.

Patten said online banking systems have allowed people to redefine a portion of their home loan in order to set payments above the minimum required.

According to him, people who paid above the minimum were well prepared for the rise in home loan rates.

Patten said there are other ways people could get home loans.

Mortgage consultant Bruce Patten says more than half of his clients are paying more than their home loans require.

DAVID WHITE / STAFF

Mortgage consultant Bruce Patten says more than half of his clients are paying more than their home loans require.

ANZ, Kiwibank and BNZ have allowed people to make voluntary additional payments of up to 5% of the amount they owe annually, without any penalties.

Other banks allowed people who found they had excess balances for each month to deposit on their mortgages to increase their payments by up to 20 percent.

Many people split their home loans into floating and fixed rate portions.

Reserve Bank data show that at the end of June, $ 279 billion in home loan arrears had been fixed for up to five years.

Another $ 40 billion was in floating-rate debt, and Patten said people can pay off their floating-rate loans as quickly as they want, without penalties.

Beaumont said about 1.1 million people received home loans and the average debt was $ 271,000.

With interest rates expected to rise prior to the current quarantine, Beaumont said: “Many borrowers are in a relatively good position to manage borrowing costs, which may gradually rise in response to changing economic conditions.

“Almost 55% of clients on housing loans have fixed interest rates, and the rest is divided between fixed and floating interest rates and only floating ones. This means that any increase in interest rates will not have an immediate broad impact on borrowers. ”

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