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David Chaston points out that your mortgage repayment plans should focus on more than just getting the best interest rate. There are other more powerful options

Personal Finance
David Chaston points out that your mortgage repayment plans should focus on more than just getting the best interest rate. There are other more powerful options

Sometimes the best home loan choice is not what you might expect.

You may seek out a good broker because you want the ‘best interest rate’ on your loan.

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 should 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 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.

The benefits don't really show up in the early years, but they magnify in the later years. The sooner you start, the better.

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.


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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 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. 


This article was written for the Global Finance (GFS) website and newsletter and is here with permission.

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12 Comments

If you're a first home buyer and just starting out, then you may already be maxed out and struggling to meet the minimum payments on a 30 year loan. Then it should be a high priority to get the lowest rate. One- and two-year rates are good at the moment.

Once some traction is achieved, the ability to repay more allows for some options. I was pleasantly surprised when we switched to one of the major banks and were offered exactly the type of arrangement David is talking about.

Without going too much into the detail, most of our loan is fixed for a short term (usually one year, because that has been the best rate in recent years), and the remainder (say $10K or $20K of the loan) is a revolving credit account, as David describes. Our pay and every-day banking goes into the revolving credit account, and one of the goals is to pay that loan down each year, basically by spending less than we earn.

There is also the facility to withdraw extra from the revolving credit account, up to what the loan would have been without the extra payments. In our case, we can withdraw another $50K whenever we want (should we want) without approval. It is not our intention to borrow more money from the revolving credit account. But is available if we need it and it could be useful in case of an emergency.

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All well and good, but the $73,000 is in 2041 future dollars not present 2016 dollars, and therefore worth significantly less in present dollars, ie 38-48% as much depending on the discount rate which I have used as 3%-4% range here. I think a revolving credit loan is a dangerous thing as it is too easy to dip into to fund any expenses you haven't got the readies for, and which over the life of the loan could largely negate any theoretical savings.

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Shhhhhhhh, never mention inflation. Sometimes it's even quietly called "capital gain" but no one likes to talk about those things and how they come about by making the next generation go into higher ratios of debt for the same.... very much older houses.

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What is your point? It is a saving on what is a static number, i.e. your loan doesn't increase with inflation. $73,000 will not be worth as much in future dollars. Are you saying it's not worth paying it off because in the future it will only be a relatively small amount of money compared to your earnings?

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The point is over that 30 years your loan maybe decreasing faster yes if you pay more than required back, but inflation is constantly increasing, and most of the 'essential' living costs in life that always go up in price ( electricity, rates etc) are doing so over that period also DIRECTLY........ in relation to house price increases and loan numbers over that time also. It's all interconnected. So, yes , being committed and diligent to paying off your loan is good.

But even better..... is not having to ask for the loan in the first place. Every finance consultant will tell you "living within your means is a good thing", but they will let that idea/ principle go when it comes to borrowing for a house/property. I.e. purchasing something you really haven't got the money for to pay outright, so you take on a mortgage.

And that idea is only 'justified' by the expectation of "capital gain". That CG is only going to come about by the next generation/individual after you...ALSO going to a bank and taking out a loan bigger than you did at some time in the near future. How long do you think that can go on without social problems being increased?

I hope that explains our point of view on this better. And yes, wages do generally go up also ( in direct relation to living costs increases, never more production) but they never go up as fast or faster than inflation. Inflation is never fought for, or needing negotiation for example.

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The exponential curve is a wonderful thing. And it works for mortgages too ! Downwards ! Pay anything off you can and it just accelerates every day. Very cool.

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If money is becoming free, then why hurry to repay??
As mortgages get cheaper and cheaper then stretching your term out, and enjoy spending your money might be better.
Once your mortgage is repaid, then what?, save into a deposit account at 1%?, hardly worth it.
Soon we may be into negative interest rates, so the bank will pay the borrower 1% for the privilege of borrowing!
Instead of saving for retirement, consider borrowing 400k just before retirement and enjoy spending over 20 years on a 30 year term.

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Have a read of this then, 40% of Swedes with a mortgage are doing exactly that, never paying it off thanks to the NIRP bubble:

http://davidstockmanscontracorner.com/debt-berg-on-the-baltic-swedens-n…

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Danish home owners / borrowers being PAID interest on their mortgage
http://www.wsj.com/articles/the-upside-down-world-of-negative-interest-…
Welcome to Negative interest rates.

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If things continue the way they are there will be intense deflationary pressure due to oversupply. Paying debt with dollars that increase in value with time is a bad idea when you drag out the repayment term.

The idea of receiving -1% interest when you have -3% inflation isn't good.

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I bought 9 properties on Interest only, and looked at paying the loans off over time. When I calculated how much I would pay off in ten years and added the effect that estimated property inflation would have, the math tole me that it wasn't worth paying any loan off. Result after 10 years I have now 7 properties collectively worth $2.4m which I purchased for $1.1m. Not paying off the loan meant that I could put more into the properties to keep them in good working order. Now Im much better off. From my experienc I would never pay off mortgages unless prices decided to slide backwards longterm, which will never happen while immigration is at the levels it is now.

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how quick could you react if we had GFC2 or are you now in a position (positive cashflow) to just ride it out.

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