Ross Barnett, Chartered Accountant from Coombe Smith Chartered Accountants shares some advice on reducing interest costs.

Interest rates are extremely low at the moment, with great long term rates available, so it is a good time to review your strategy.

1.  Are you on a higher long term rate, over 6%?

Ask your bank what the break cost would be.  We are finding that some clients are managing to get no break fees, so it is worth asking the question!

2.  Do you have a high floating amount, over $50,000?

On www.interest.co.nz the standard floating rate is around 6.74%.  In comparison, you can fix for 2 years at 5.39%.

So, in general terms, it is not a good idea to have too much on floating, and ideally you want this to be an amount that you expect to pay off before your next term loan comes up for renewal.  I also find that a small balance of $20,000 or $30,000 is easier to pay off, whereas a big amount like $300,000 is psychologically harder to get to terms with and just never seems to substantially reduce.

3.  Long Term Risk

I like to spread loans between short, medium, and long term.  It’s the old saying of “don’t put all your eggs in one basket.”

I try to get a rate that I’m happy with, and that suits my property portfolio, rather than chasing the best rate.

So, for example, if you had $630,000 debt, you might:

• Float $30,000
• Fix $200,000 for 1-2 years, maybe around 5.1% to 5.2%
• Fix $200,000 for 3 years, maybe around 5.4%
• Fix $200,000 for 5 years, maybe around 5.5%

This gives a very low average interest rate, but also good long term protection if interest rates do go up.

4.  Reserve Bank Risk

The Reserve Bank, Government, and media seem to be constantly talking about ways to stall the Auckland property market.  There are ideas discussed all the time, like capital gains tax, land tax, higher interest for property investors, ringing fencing losses, etc. Click here to read an interesting article (“Property Investors Urged to take Precautions“) that appeared recently in the NZ Herald.

So be careful and just don’t presume that “you’ll be right” and that interest rates will stay low.  In my opinion, it is better to spread your risk and look at an option like my Point 3.

Main point if you are re-fixing:

Ask for a better rate than advertised.  It doesn’t hurt to ask and the worst that you can get is “no”.  But if you are in a good position, with good income, you should be able to get a better rate than publicly offered.  For floating rates, you can quite easily get 0.50% off, and fixed rates are negotiable.  If you can’t get a good rate, talk to a good mortgage broker!

You can contact Ross Barnett from Coombe Smith Chartered Accountants on Phone: (07) 839 2801 or visit their website – www.cswaikato.co.nz