The impact of lower interest rates

The Herald reported:

John Key has defended a decision to cancel sales of affordable housing in an Auckland development, saying low interest rates are making it easier for first-time buyers and people on low incomes to afford their own homes.

So how much of an impact do lower interest rates make? Quite a lot as you will see. The caution is that interest rates vary over the life of a mortgage, but they have been low for some time now.

The average house prices at present in NZ are $397,905 nationwide, $443,070 in Wellington and $523,518 in Auckland. Now if we assume a 10% deposit and a 20 year term mortgage, what does 5% mortgage rates mean compared to 8%.

• NZ – $632 a month lower mortgage payments, saving $151,684 over 20 years
• Wellington – $704 a month lower mortgage payments, saving $168,901 over 20 years
• Auckland – $832 a month lower mortgage payments, saving $199,569 over 20 years

Alternatively if one kept the repayments the same, then the savings are even greater:

• NZ – mortgage paid off six years earlier, saving $222,199
• Wellington – mortgage paid off six years earlier, saving $247,424
• Auckland – mortgage paid off six years earlier, saving $292,383

So if you have a mortgage for 90% of the median house value in Auckland, a 1% reduction in interest rates gives you around $60 a week more in the hand.