Property prices are sky high, interest rates are rock bottom, and the Reserve Bank reports that there is between $1.2 billion to $1.7 billion worth of home loans approved every week. What that spells is a New Zealand where debts are high, but actual servicing costs are low. It's no wonder, then, that so many people are happy to take on debts that might otherwise be impossible to maintain.
But can that last? Interest rates, by their very nature, are variable beasts, and they aren't necessarily going to stay at these historic lows forever. People are perhaps looking at those single digit percentages and starting to sweat about them slowly ticking up over the 30-year lifetime of their loan. Wouldn't it be better to take action before that happens?
Here's how you can pay off your loan faster, instead of waiting in fear for the return of the interest rate.
Think of it this way. Let's say you have a $500,000 home loan on a 6 per cent interest rate. You would be paying about $700 a week in repayments over 30 years, paying 2.15 times the amount you borrow by the end of it. Stretch that out to just $50 extra, or the cost of a $10 lunch at work every day, and suddenly your mortgage drops to 25 years, and you'd only pay 1.93 times the amount you borrow.It's all about paying more than you need to. All too often, people only pay the minimum required repayments on their loan, and that's what locks you into a long-term debt. It might seem obvious to simply answer "pay more" to a question like this, but in reality that is the main option you have. The difference is in the way you deal with it psychologically: one bite from an elephant is a lot less than trying to deal with the whole thing at once.
However, the difficulty appears when you do that week after week, month after month, and you don't see much of a difference until the very end. That can be psychologically draining, so here's our tip from JB: Split up your loan.
Instead of trying to tackle $500,000 all at once, try splitting your loan up into $450,000 fixed rate and $50,000 variable. Try to tackle that $50,000 first. Knock it out in, say, two years. Then take another lump and do it again. Rather than throwing money into what feels like a void, you slowly see that debt disappear, and you don't feel any the worse for it.
If you are looking to find out how much you can borrow for a home loan and what your repayments would be, you can use our mortgage calculators to calculate this.