Interest rates are falling — should you cut your home loan payments?

Home loan borrowers are facing a "massive" opportunity to save money — if they can afford to.

Interest rates are starting to fall for the first time since 2020, and people who do not lower their repayments when it comes time to refix on to a lower rate can save a lot of money.

Broker Glen McLeod of Edge Mortgages said people could find "massive savings".

A $500,000 mortgage over a 30-year term at 6.85% might cost $754.41 a week, he calculated.

If the rate dropped to 6.35% but repayments stayed the same, the extra $37.90 a week that would go on to reducing the loan's principal if you kept your weekly payment at $754.41 would save $96,506.26 if that continued over the term of the mortgage, and could mean the loan was paid off four years early.

If the rate dropped to 5.35%, the extra repayment would save $164,408 in interest and cut nine years off the loan term.

He said it would also give people more flexibility next time interest rates rose.

"While it goes down and you keep payments higher you obviously make gains. But when it starts to get tough again and you've been overpaying, when it comes to trying to reconfigure it, we can go 'alright we'll push you back to where your original term would have been'… with all those extra payments you can push it out again so the payments aren't going to be as high if we go back to what a normal term would be. It enables that little bit of flexibility."

He said some of his clients had kept their payments at pre-pandemic levels even as the interest rates fell.

"They were coming off some really high rates, in the eights… if they came down to 2.19% and had been paying 8%, when it flipped over... that didn't affect them at all. They've now made thousands and thousands of dollars."

He said some people would not be able to afford to keep their repayments on the same level because of the pressure of rising costs, but there was a huge opportunity for those who could.

Another adviser, Karen Tatterson, of Loan Market, said it would come down to individual circumstances.

"Where the affordability is there, I am encouraging clients to keep their repayments as is. If the affordability is not there, then the reduction in mortgage repayments will offer some financial relief in the short-term.

"In saying that, I am suggesting that they take a shorter-term fixed period rather than a longer term fixed period — say up to 18 months — and then we plan for a full financial review at this stage to revisit the affordability and whether it is viable to adjust the repayments,

"As you know, a few extra dollars per loan repayment can make a significant difference and I am all about educating my clients to ensure they are fully armed with this knowledge. I think it is particularly important for first-home buyers, and in an example this week by keeping the repayments the same we have saved over $100,000 in potential interest costs over the life of the home loan and reduced the loan term by four years."

rnz.co.nz

Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.