But surprisingly, the ‘best’ may not be the ‘lowest’. In fact, it might be one of the higher rates, a floating rate.
The key is to shift your focus; it is not the interest rate you pay that you may want to concentrate on, but the rate (speed) you pay your loan off.
The faster you pay your mortgage down, the lower the interest you will pay.
The benefits of a faster pay-down will far out-weigh the benefits of a lower interest rate.
You can achieve this by signing up to a revolving credit account. These combine your home loan and everyday banking in one account. When your salary is paid into your account it reduces what you owe on your loan – which means you pay less interest. If you have a credit card, you could put all your month’s purchases on the credit card and then pay it off automatically up to 55 days later, interest free.
That’s the idea. Here is a graphic that shows the principle:
(This hypothetical example also shows how a lump-sum bonus can boost the benefits too, and allows a slower pay-down over the last four years.)
But there is a big ‘but’ – you need to be disciplined over a long period.
If you don’t use it as intended you could easily end up paying more interest, even getting trapped in an out-of-limit situation you can’t easily get out of.
The same bank that was happy to see you sign-up to the revolving credit facility will love to point out that the more you use that credit card ‘interest free’ the bigger the savings – ignoring you need to pay in full, on time.
The same bank that was happy to see you sign-up to their revolving credit facility will readily let you draw it back up to its limit for that latest ‘must-have’ purchase – perhaps a new car, perhaps that special trip away with the All Blacks, the latest smart phone. If you run a revolving credit facility at its limit you will have wasted the benefits and the reason for signing up in the first place.
The goal is to save interest - by spending less on an interest incurring account. Every action that doesn’t save is a backward step.
Which is why you need long-term personal discipline.
And a good broker, (such as Global Financial Services), can provide that moral support to stay on the plan. An outside professional can be the counter-influence when you are tempted. And you will be tempted often because this strategy only works over a long time period.
However, the effort is well worth it.
You could pay off your loan years earlier saving tens of thousands in unnecessary interest. All from a disciplined plan, one where you actually paid a higher interest rate.
Your broker or mortgage manager can show you how it will work for you, using the detail of your personal circumstances.
Note from GFS - Global Financial Services Ltd (GFS) are providing such consulting services over the last 17 years and are capable of providing you a tailor made written plan as well. We thank David Chaston, (publisher of interest.co.nz) for writing this article for the benefit of consumers.
Disclaimer: Please do not take any decision on the basis of the information contained in this article as each person has unique or different circumstances. These are the views of the author expressed to illustrate a specific situation and not necessarily views of Global Financial Services Ltd or its associate companies and Directors. Neither the writer nor GFS nor its employees are responsible in any way for any losses or omissions incurred due to the information contained in it.