The 1.99 percent mortgage rate: Is it worth the switch?

OPINION: Anyone watching the mortgage interest rates over the past few months has seen them gradually, but consistently, falling. Best of all, the variance between the banks is small; at the major banks, the difference access almost all offered rates is around 0.1 percent. Gone are the days of jumping ship because your bank's rate was 0.4 percent higher than the next one. That was until Heartland Bank recently released their one-year fixed rate at 1.99 percent. An all-time New Zealand record and around 0.5 percent cheaper than the main banks.

Heartland is well placed to offer this cheaper rate. Their overheads are likely to be significantly lower than the major banks just from sheer size. And, as all pricing in the financial markets is based on risk, Heartland is likely to be extremely picky with who they give this money to. They will want only the most secure of applicants.

A difference of 0.5 percent equates to savings of $500 per $100,000 borrowed. So for a mortgage of $500,000, the savings amount to $2500 per year, or roughly $50 per week, which is no small amount.

If you are looking to change, however, it would pay to check several things to make sure you are coming away with some financial benefit. If your mortgage is locked into a fixed term, there may be break costs to pay your current bank.

There will also be conveyancing costs, which could range between $1000 to $1500. Heartland also doesn’t appear to offer a cash contribution, which most main banks do. A $500,000 mortgage at a main bank could get you a cash contribution of between $2500 and $3000, although you may have to pay this back if you break.

At the end of the day, it’s great to see a smaller bank putting pressure on the larger banks to reduce their interest rates. And for some financially-clean applicants, it may be an opportunity to get sub-two percent bragging rights at the neighbourhood BBQ over summer. It’s likely that in a few months the main banks will offer that rate too, particularly with the Reserve Bank making moves to give the banks access to cheaper funds through the Funding for Lending Programme (FLP) next month.

No matter which option you go with, take this opportunity to attempt to pay down your mortgage by making extra payments. Ideally, aim to pay your mortgage as though it was 8 percent per annum, because the majority of household owners with more than ten years left on their mortgage will probably see that rate again in the future and whether you paid 1.99 percent or 2.49 percent will seem comparatively inconsequential.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.