Strategy three, extra repayments. As you indicated Jase, with interest rates, when they were going up, more difficult to make extra payments. But when you're on a fixed interest rate, you can still make extra repayments depending on the lender.

Some lenders let you increase your payments by up to 20% with no early repayment charges. Some lenders let you make up to extra payments of equal to 5% of the home loan balance in any 12-month period. So, if you owe $300,000, let's keep it simple, you can make extra payments up to a maximum of $15,000, which is 5% over a 12-month period. Or you can make a lump sum payment on fixed term.

Jason: So, they may not like that necessarily if you decide to pay it off in full, which in the States can be quite common to just pay off your loan in full. So, they might want a bit of an exit fee or anything like that here in New Zealand?

Matthew: It's actually a really good question. So, firstly if you're on a floating interest rate, you can do whatever you want.

Well, you can still pay off a loan whenever you want, right? No lender can legally say, “but you owe us this money you can't pay it off.” So firstly, you can still pay off your home loan in all instances, right? So that's the first point. You've got to check your fees, which we're going to talk about shortly, depending on the lender.

But point number two is, if you're on floating, you can make extra payments, you can make a lump sum, or you can pay off your home loan whenever you want. There’s very limited fee associated with that. You need to check with your lender again, but usually very limited fees because you're on a floating interest rate. Now, you're actually talking about break fees, aren't you?

Jason: Break fees, yes sorry. What are these break fees? Tell me about that.

Matthew: So, you know how I said with extra payments on a fixed term, and they'll let you make payments, depending on the lender, up to 5% of the loan amount. So, if you go over that, or you want to pay the loan off, let me give you an example, because I don't want to make it dependent on the interest rate of this video.

But let's just say you locked in $500,000, let's just say at 6%. So, you've locked that in for 12 months with lender A. So, Jase you go, my American tax business is doing really well. I'd like to pay off my home loan today. If the interest rate today is 4%, the lender has already actually locked in behind the scenes that 6% interest rate. So, if you're going to repay them early, they can't lend that money back out at 6%. They can only lend it back out at the market rate, which is 4%.

So, they've got a 2% loss. And the only reason is, because they don't gamble against you, right? If you lock in a 6% with them, theoretically, they just go into the market and lock in, or with their funding, they make sure they can actually deliver that 6%, right? So, they'd actually lock in their rate behind the scenes, okay? And they're left with a margin there.

But if rates drop, say to 4%, you're going to go, cool I want to pay off my loan now, my $500,000. The bank's like, well... hold on, we can only lend it back out at 4% when we've already committed or locked in our lender at 6%, out of the money that we've got the money from. They're going to make a 2% loss. Say if you had 12 months to go, again, there's more things that go into break fees. But as a guideline, you'd be looking at 2% of the $500,000 which is $10,000 in that example. Because that is an actual loss, right? They can't lend the money back out. The rates have dropped. So, they can't lend it back out at 6%.

If they could lend it back out at 6%, let's just say rates hadn't changed, like you locked in 6%, rates were still 6%. Well, the bank can reloan that money back out at 6%. Therefore, there's no break fees. Or if interest rates had gone up, the bank can go, cool, we've locked in 6%. We can actually reloan that money back out at 6.5%. We don't have a loss.

They're not going to give you the profit. They're not going to charge you any break fees. They'll be keener on retaining, because they might be losing you at that point as well.

Jason: Very interesting to see how they work here in New Zealand and some similarities to the USA. But yeah, overall, very different. But this is great and it's great info. And hopefully sharing this with your client base will help people sort of meet their other goals. They may have goals of paying down a home a little bit and using some of that equity to buy an investment property or a business. You never know.

Matthew: And I've got a special tip for you, Jase. A couple of things just to finish off. Thanks for all of that, by the way.

So, extra payments on fixed term, that's a really good way of paying off your loan faster, because you're making extra payments. You know how, like when rates were going up, it's much more difficult to make extra payments. A lot of people are just trying to actually just make ends meet and actually just make the additional payments because rates went up.

Key trick is, a lot of people are aware of this, had some clients use this a lot, is if rates come down, if you keep the same repayments, quite often you end up knocking years off your loan.

I had a guy in the last round of rate drops quite a few years ago. The rate dropped quite a bit. He actually just kept the same payment. He knocked 8 years off his loan, saving like hundreds of thousands in interest. He just kept the same payment when the rates dropped. And he knocked 8 years off his loan. And he was also making quite a bit of extra repayments, or he did for a while. Then he kind of stopped, had a break. I think he went on holiday or something. And then he continued to make extra payments.

He was actually in conjunction with that. We also had an offsetting facility, one of these over here that first one we talked about. And then I think also we used revolving credit as well a little bit. He actually was able to pay off his loan in like 12 years or 11 years. He was saving hundreds and hundreds of thousands of dollars in interest. He was in his 40s with no mortgage. So, that was his goal. He achieved that. It does take a lot of discipline, but you can utilise some of these strategies.

So, a good Mortgage Adviser or Financial Adviser will help set up those different strategies to suit you personally.

Jason: That is so good. And I'm pretty sure we'll be able to utilise some of that. So, thanks for taking the time to share all that with me, I really appreciate it.

Matthew: Yeah, you're most welcome.

Matthew Dawe

Mortgage Broker | Financial Adviser

Phone: 027 321 4287

Email: mortgages@matthewdawe.com

Facebook: click here

Book a free consultation: click here