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.