All these questions are important and require thought and understanding.
However, one of the major findings of the recent ANZ-Retirement Commission Financial Knowledge Survey was that understanding of these issues was weak. Even among some of those who have current mortgages.
For example, a quarter of existing mortgage holders did not know that paying fortnightly instead of monthly could help them reduce the amount of interest they pay.
Because there are 26 fortnights in a year, you end up making more repayments than if you paid monthly – paying your mortgage off faster and saving on interest.
Say you have a new $250,000 mortgage fixed at 8% and you’re making monthly repayments of $1,780. If you change to making fortnightly repayments of $890 you will save over $103,000 in interest alone and pay off your loan in 25 years instead of 34. That’s a significant difference for very little extra.
Fix or float?
Twenty percent of existing mortgage holders surveyed were unable to identify that it was better to have a fixed interest rate rather than a floating rate when interest rates were expected to increase.
With a fixed interest rate on your mortgage you can lock in lower rates if market interest rates are rising. A one percentage point difference in interest rates can save you thousands of dollars over just a year or two.
It is also possible to split a loan between fixed and floating rates. This lets you make extra repayments without charge on the floating rate portion, while you get lower rates on the fixed portion.
Your home is likely to be the biggest purchase of your life, and a mortgage your biggest financial commitment. Choosing the right mortgage and repaying it quickly can save you thousands of dollars. It can also free you up faster to look at other goals in your life.
Find out more
To find out more about how you can make your mortgage work for you visit
www.sorted.org.nz. Sorted is free, independent and packed with helpful information, tools and calculators to help you get ahead.
