My BRB Mortgage › Rates and repayment

Rates, terms and repayment

The rate is the number everyone compares, and it is only one of three that decide the cost. The other two are the term over which the debt is repaid and the way the rate is allowed to move. All the arithmetic below is worked from assumptions printed with it.

Fixed and adjustable, and what each transfers

A fixed rate holds for a stated period, which may be the whole term or an initial part of it. The borrower knows the payment; the lender carries the risk that market rates move.

An adjustable rate moves with a reference rate after an initial period, usually within stated caps on how far it can move at each reset and in total. The borrower carries that risk and is normally compensated with a lower initial rate. The question is not which is better in the abstract but which risk the household can actually absorb, and for how long it expects to hold the loan.

Term length

Lengthening the term lowers the monthly payment and raises the total interest, because the balance is outstanding for longer. Shortening it does the reverse. The table shows both effects on an assumed loan of 200,000.

The difference is larger than most people expect. At the assumed 6% rate, the fifteen-year payment is roughly 1.41 times the thirty-year payment, not double it, while the interest paid over the life of the loan is a fraction of the longer alternative.

Points, fees and the true comparison

A quoted rate can be bought down by paying a fee at closing, usually expressed as points, each point being one percent of the loan. Whether that is worthwhile is a payback calculation: the fee divided by the monthly saving gives the number of months after which the household is ahead, and the answer only matters if the loan is still in place then.

Comparing offers therefore means comparing the whole package — rate, points, lender fees, insurance requirement and any charge for early repayment — rather than the headline figure. Standardised cost disclosures exist for this purpose in most jurisdictions.

Overpayment arithmetic

Because interest is charged on the outstanding balance, an extra payment reduces every future interest charge, and does so most when the balance is largest. That is why regular overpayment early in a term shortens it dramatically while the same money applied late does little.

Against that stands liquidity. Money paid into a house is difficult to retrieve; money in reserve is available when the roof, the car or the job requires it. The usual sequence is to establish the reserve first and overpay from surplus afterwards.

Refinancing

Refinancing replaces one loan with another, typically to lower the rate, change the term or draw on accumulated equity. It is a new loan and it carries a new set of costs, so the same payback arithmetic applies.

Two details are easy to miss. Restarting a thirty-year term at a lower rate can raise total interest even while lowering the payment, because the clock resets. And drawing equity converts an asset into a larger debt secured on the same property.