Short term gain, long term pain

ROB STOCK
Last updated 05:00 16/02/2014
 Karen Tatterson
PETER MEECHAM
Warning: East Auckland-based financial adviser Karen Tatterson at her office in Botany.

Relevant offers

Money

A thousand people a year challenge mistakes in credit files Savers have options if they want a better return than banks can give them Health confessions from people in our most populous centres 'Health age' research spells out grim outlook for many Inquiry which found Newshub leaked interest rate decision cost taxpayers $59,000 Predicting your KiwiSaver account balance easier with new Kiwi Wealth tool Budget 2016: It's not so tough at the top while the bottom 'gets ignored' Auckland family of 10 appeals $78,000 Work and Income debt Seven ways to answer difficult job interview questions about money New Zealand's $750 billion man in London calls for compulsory saving

Some homeowners are unwittingly refixing their mortgages from 25 to 30 years, prompting warnings from Auckland mortgage broker Karen Tatterson.

Tatterson, who works for Loan Market brokerage and is on the board of the Professional Advisers Association, says homeowners are switching banks in pursuit of the sharpest interest rates. But they often don't realise that, when they do so, the default position of banks is to set mortgages for 30 years, she said. That means your monthly repayments will be cheaper in the short-term but overall you'll end up paying more interest on the loan.

Homeowners who do switch are often prompted by the search for lower interest rates, but Tatterson says she has seen instances of people assuming the lower monthly repayments are a factor of saved interest when the reality is that extending the term by five years is playing a big part.

"If they go from one bank to another to refinance, if they don't ask the bank for a 25-year term, it will default to 30 years," she said. "They feel they are winning because they are getting lower monthly repayments, but they are paying more in the long term."

Tatterson has calculated how costly another five years is on a standard mortgage.

"In the first few years of your mortgage, you mostly pay interest - it takes a while to start chipping away at the principal. This is especially important for those thinking about refinancing their mortgage to another lender in the first five years."

"Assuming the same rates and fees, an initial loan of $350,000 refinanced at the end of year five at the standard term of 30 years, will be $10,068 higher in principal at the end of the next five-year period simply due to moving banks."

And they'd have reduced monthly payments by around $100 only.

Using that thinking, she suggests anyone with a 30-year loan look seriously at shortening the term.

"If you are on a 30-year mortgage, ask the bank what it will cost to switch on to a 25-year term, or even shorter," she says.

"It may only be around $100 extra a month."

Ad Feedback

- Sunday Star Times

Special offers

Featured Promotions

Sponsored Content