28/08/2020
How to pay off your mortgage quicker...
It sounds simple but relatively small increases to loan repayments can have a big impact, reducing the time it takes to repay and the interest cost.
For example, a $450,000 loan, over 25 years at 3.39% would have a minimum payment of $1,024 per fortnight.
Increasing the repayment by $50 to $1,074 would reduce the term to 23 years 3 months and save $16,682 in interest over the life of the loan.
A $100 increase reduces the term to 21 years 9 months and saves $30,893 interest, $200 reduces the term to 19 years 3 months and saves $53,540 interest.
It can be easier than you think to find the extra money to increase the repayments. It may be as simple as buying a few less coffees and bringing your own lunch a few times a week.
Creating a budget will often lead freeing up funds to use towards the loan repayments, the Sorted website has some great tips and tools – https://sorted.org.nz/guides/planning-and-budgeting/
Pocketsmith, a Kiwi company also has a great app to manage finances and set goals - https://www.pocketsmith.com/
Other ways can include reviewing your utilities providers to get a better deal, reviewing insurances, loan structure and spending habits.
Rates are low at present, lower than ever – if you are re-fixing then keep payments at the same level
If you have a loan due off its fixed term soon it will be coming off a higher rate than what is currently available. If you are not on interest only terms the minimum repayment will go down, the key here will be to keep the repayment the same as it was (or higher if you can). You will be used to paying that amount already and it will have a big impact –
$450,000, 25-year term, fixed 12 months ago for a year at 3.39% had minimum payments of $1024 per fortnight.
The loan balance is now $438,363 and the 1-year rate is 2.55%*. The new minimum payment is $937 per fortnight.
Keeping the repayment the same at $1024 means an additional $87 per fortnight is being paid off the balance. This reduces the loan term down to 21 years 4 months and saves $17,411 in interest over the life of the loan.
That’s quite a big saving for not really changing how you do things!
If you can increase the repayment more it will have an even bigger impact, adding an extra $50 to make the repayment $1074 reduces the term to 20 years and saves $25,830 in interest!
Other ways
There are other ways to reduce interest costs such as utilising a revolving credit facility. All banks have this type of facility, ANZ call it a Flexible Home Loan, ASB an Orbit, BNZ Rapid Repay and Westpac Revolving Credit.
The key benefit of revolving credit is that it can save you interest by reducing your daily loan balance as much as possible. Revolving credit loans are transactional accounts, like an overdraft in many ways. You have your salary paid directly into this account thus reducing the balance, as interest is calculated daily you keep the balance as low as you can for as long as you can. You can also make lump sum payments into the account and withdraw again when needed.
Another way is an offset loan, these work by linking your savings account to a loan and you only pay interest on the difference between the two balances. For example, you have $50,000 in savings and an offset loan with a balance of $100,000, the two accounts are linked so you only pay interest on the difference - $50,000. These types of account are great for those who need to keep funds separate (e.g. tax & GST) but want to use those savings to reduce interest costs. Only Westpac and BNZ currently offer these facilities.
These are some of the options available to assist in paying the mortgage off quicker, we are here to help so please get in touch to discuss as you could save time and money!
*based on advertised special rates as at 28/08/2020.
Note: Calculations are a guide for illustration purposes only.
