First home buyers, take note: when seeking a mortgage, ask silly questions.
Dr Pushpa Wood is director of the Westpac/Massey Fin-Ed Centre – a joint venture between Massey University and Westpac aiming to help people make better financial decisions – and advises first home buyers do their homework.
Westpac has just announced a move to help some first home buyers with a competition where four lucky winners will pay no interest for the first year of their home loan, offering savings on an average first loan of around $23,500*.
But they know not every first-home buyer can take advantage of this – and acknowledge some need help with the 'art of saving'.
Ask the silly questions
Part of that art is saving money on your mortgage, as Wood recommends: "Talk to your bank or whoever you're arranging your mortgage with, and don't think of them as someone who doesn't have your best interests at heart or someone you can't question about the options they are offering, because you need that working relationship with your bank or your mortgage broker.
"Try to ask what I call all the 'silly questions' about your mortgage options, like how long is it going to take me to get rid of it, how much will I end up paying in interest and what other options can you offer me to get rid of my mortgage sooner?"
When enquiring about paying additional amounts off your principal, also ask about penalties that might be incurred, she says.
"My mortgage allowed me to pay 10% off the principal in lump sums each year without incurring any penalty, so, in addition to paying my mortgage fortnightly, my target was to keep putting some money aside each year towards that. Even if you can pay off an additional $500 it still makes a difference."
Small changes can save thousands
When it comes to directing additional savings towards your mortgage, Westpac's Chief Product Officer, Shane Howell points to concrete examples where seemingly small changes can ultimately save thousands of dollars and take years off your term:
- Increasing repayments, even by a small amount, helps. A homeowner with a $500,000 mortgage who pays an extra $50 off a fortnight could save $39,500 in interest and take two years and four months off their home loan*
- Take advantage of falling interest rates by keeping repayments the same, rather than adjusting to the lower amount.
- Making lump sum repayments if you get a bonus or tax refund also saves you interest over the life of the loan. For example, winners of Westpac's first home buyer prize draw who don't have to pay interest for the first year of their home loan could take these savings at the end of the year and make a dent in their principal- ultimately saving $62,500 in interest over the life of the loan, paying it off two years and 9 months faster.*
*Assumes $500,000 mortgage with a 30 year loan term at 4.7% p.a.
How to save that lump sum for a deposit
Wood says there are two primary options: increasing your income by using any additional skills or time you may have, or reducing spending. The latter involves a hard look at expenditure and separating wants from needs.
Keeping a spending diary – where all expenditure is recorded – can give you a firm handle on where your money is going.
"It's very hard to save money on your needs, so it's about looking at what proportion of your spending each week is going on your wants and whether you can shift the majority of that 'wants' money towards your savings goal," she says.
"Once you've established a target, it's about having a really dogged approach to it - not 'I'd like to meet it', but 'I am going to meet it'."
Realistic goals are vital
As house price inflation continues, first home buyers are under increasing pressure to save every dollar possible to meet burgeoning loan deposit requirements – and Wood says realistic goals are vital.
"You start by saying 'I need to save X amount, and I'd like to have that saved by X date'. Then you can work backwards by saying, 'okay, I have 100 weeks to reach my target. How much will I need to save each week?’
"Once you've done that you need to have a really hard look at those figures and say, 'are they actually realistic under the current circumstances, or am I dreaming?' You need a reality check."
A surprising statistic
Talking about reality, most first-home buyers might have overlooked this amidst the headlines surrounding Auckland's housing crisis: the proportion of household income spent on mortgage repayments has remained relatively stable over the past year.
Howell says although rising house prices have increased home loan deposit amounts, the declining interest rate environment has helped balance matters.
"From an affordability perspective, mortgage payments as a percentage of income have remained almost flat, both in Auckland and other regions, because of how far rates have fallen in the past 12 months," he says.
"While interest rates are low right now, borrowers should be prepared for potential changes to the interest rate environment."
This is important because the overwhelming perception from the rising prices scenario is that even those who get a foot on the first rung of the property ladder might be consigning themselves to a heavy burden as they repay their mortgage.
It's also important because a house purchase usually means further demands on homeowners' wallets. Separating wants from needs is vital when managing home expenses such as rates, insurances, maintenance and especially improvements, says Howell.
"Do you need to do the bathroom renovations first or do you focus on the roof repairs that will make the home water tight? You need to go through the different scenarios and ensure you're making the trade-offs that will have the best effects long term."
To find out more about your chance to win your home loan interest paid for a year, visit Westpac.co.nz/paynointerest