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Glen McLeod is director of Edge Mortgages. He’s answering readers’ questions about home loans, whether you’re a first-timer just getting into the market or someone who already has a loan and is wondering about the best way to manage it. If you have a query, email susan.edmunds@stuff.co.nz
Several banks are advertising cashback offers at the moment. Is it better to get a cheaper interest rate, or a bigger cashback? How can I tell which will leave me better off?
Well this all comes down to the numbers.
You need to look at the fundamentals of the transaction.
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What is the difference in the interest rates? To keep it reasonably simple, if you were looking at a one-year interest rate comparison with interest only payments, on $500,0000 of borrowing:
Bank A is offering 5.19%, with interest cost of $25,950.00 and cash back of $3000.
Bank B is offering 5.35% with interest cost of $26,750.00 and cash back of $4000.
That means Bank A is $800 cheaper with interest but Bank B offers $1000 more in cash back.
The difference in the interest saving and the cashback with Bank B would mean you are $200 better off.
Take the same transaction with principal and interest payments: Bank A is offering 5.19%, with an interest cost of $25,782.03 and cash back of $3000.
RICKY WILSON/Stuff
Glen McLeod says you’ll need to think about lots of aspects of the loan offered.
The balance at the end of 12 months will be $492,872.39.
Bank B is offering 5.35%, with an interest cost of $26,581.88 and cash back of $4000. The balance at the end of 12 months will be $493,077.04.
Bank A is $799.85 cheaper with interest but Bank B offers $1000 more in cash back. With Bank B you are $199.85 better off.
However, if you then take the remaining balance at the end of the year and both lenders provide you with 5.50% for the remaining life of the loan, the total interest paid with Bank A is $494,294.30 while the total interest paid with Bank B is $494,498.18.
Bank A is slightly cheaper in the long term by $203.88 overall because you have paid off more principal in the first year.
The reality is that if you are looking at the short-term side of things it is easy to weigh up the best option. However as you dig deeper you may be surprised, especially when you look into some of the fine print around the features of the loan product you at taking out. Examples of this are whether you make extra payments while in a fixed rate period. Some lenders enable you to make 5% reductions each year without penalty. So the flexibility of the loan product may have a greater bearing overall.
That is why it is important to discuss your mortgage options with a qualified financial adviser that is able to provide advice on mortgage products. Without the guidance you may not see what is hidden under the surface.
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