Prioritize high-interest $150k loan for overpayment to reduce overall interest. Opt for an 18-month term for flexibility amid potential interest rate changes, balancing stability with a 2-year option. Consider risks, adaptability, and align strategies with broader financial goals, seeking guidance from a financial advisor for optimisation.
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“I’m coming up to refix time for half of my mortgage and am trying to decide how long to fix for and how much to overpay each half. Here is the split: $125k Fixed til the end of 2024 at 3.49%. $150k Fixed til the end of this year – refix options I’m looking at are 18 months at 7.09% (ouch) or two years at 6.99%. My assumption is that overpaying the larger interest loan will make the most sense, assuming that the other one won’t be at an even higher rate when it comes to refixing at the end of next year. I have the opportunity to set repayments higher now during refix. I’m leaning toward doing 18 months; thinking rates may have flattened or even dropped a bit by that point. I’ve also got a floating portion that I’ve paid down to a balance of 0, and I plan to just leave that there as a safety net to draw on if I need it, given it’s not costing me any interest.”
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Interest Rate Prioritization: Start by assessing the interest rates on your loans. Since the $150k loan has a higher interest rate (6.99% or 7.09%), focus on overpaying this portion first. By doing so, you’ll reduce the overall interest paid over the life of the loan, ultimately saving you money. Ensure that any overpayment aligns with the terms and conditions outlined in your mortgage agreement.
Refixing Strategy: Your consideration of an 18-month term for the $150k loan reflects an anticipation of potential interest rate changes. While shorter terms offer flexibility, predicting future interest rate movements is challenging. Evaluate your own risk tolerance and consider economic factors that might influence rates. Alternatively, the 2-year option at 6.99% provides some stability but limits flexibility. Striking the right balance between flexibility and securing a favourable rate is crucial to your decision.
Flexibility and Risk Mitigation: Shorter terms provide more flexibility, allowing you to react to changes in interest rates. However, this flexibility comes with the risk of facing higher rates during the next refix. Assess your ability to adapt to potential changes and whether the potential interest savings from a shorter term outweigh the risks. Additionally, keep abreast of economic indicators that might impact interest rates in the coming months.
Loan Size and Financial Goals: Given the larger size and higher interest rate of the $150k loan, allocating overpayments to this portion is a strategic move to minimise interest costs. Ensure that this approach aligns with your broader financial goals. Consider maintaining a balance between overpaying on the mortgage and allocating funds to other financial objectives, such as emergency savings, investments, or debt reduction in other areas. A holistic financial plan, including consultation with a financial advisor, can help you optimise your approach based on your overall financial picture and aspirations.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances or contact National Capital.
