If you don’t review your home loan every year, then you could be missing out on significant refinancing savings. This is especially important in the rising interest rate environment that we’ve been experiencing over the last year in New Zealand. Read on to find out about key considerations when reviewing your home loan.
Key consideration 1: Have market conditions changed?
The answer to this is obviously ‘yes’, and they are likely to continue to change in the short to medium term in New Zealand. After a long period of relatively low and stable interest rates, they have risen sharply in recent times.
Because home loans usually involve large amounts, even a slight difference in interest rates can make a big difference to your overall repayments. For example, the table below shows the difference in repayments on a $500,000, 30-year home loan when there is a 1% difference in interest rates.
|
Interest rate |
Monthly repayments |
Total amount payable |
|
5.5% |
$2,839 |
$1,022,020 |
|
6.5% |
$3,160 |
$1,137,722 |
As you can see, a 1% interest rate difference on a $500,000 loan over 30 years increases your monthly repayments by $321 and your total repayments over 30 years by a whopping $115,702!
Every year, you should compare your current home loan rate to others available on the market. You may be better off refinancing, provided the benefits outweigh the cost.
If you’re worried about future interest rate rises, you can fix your interest rate for a set period i.e. 2 years to ensure peace of mind. When you have a fixed rate, your rate won’t change even if market rates do.
Key consideration 2: Has your financial situation changed?
Your financial situation will inevitably change over time. For example, your income can increase if you get a promotion or a new job. It can temporarily decrease if or when you or your partner have children. Your expenses will usually increase over time, especially during times of higher inflation rates like we’re experiencing right now in New Zealand. They will also likely increase if you decide to raise a family.
All of these factors can positively or negatively impact your home loan repayment ability. You should review your home loan repayment arrangements whenever your financial situation changes.
Key consideration 3: Can you afford to make extra repayments?
If you can afford to make extra repayments, it will help you to pay off your home loan faster. If you can’t afford to increase your monthly repayments by a significant amount, one smart strategy to make extra repayments without noticing them is to divide your monthly repayment by four and make it weekly instead. Because there are slightly more than four weeks in a month, over the course of a year, you will make an extra month’s worth of repayments.
One-off lump sum payments can also help you to pay off your home loan faster. For example, you could put some or all of a tax refund into your home loan instead of spending it.
It’s crucial to review your home loan when market conditions change like they are in New Zealand at the moment. You should get into the habit of reviewing your home loan every year to make sure it continues to be good value and suitable for your changing financial circumstances and needs over time.