Making it onto the property ladder is a huge milestone, but the journey doesn’t end there. Every week, Kiwis are taking on incredible amounts of debt. Depending on the terms of a mortgage, you could be making repayments well into retirement and even have a property pass through your hands without ever fully owning it.
We know how intimidating the thought of a lifelong mortgage can be, so we’ve put together our top tips for helping you manage your debt and pay your mortgage off faster.
It can be tempting to arrange an automatic payment and then set and forget, especially if you’ve secured a hot rate and want to pursue other investment opportunities, or just spend your extra pocket money on other things. So what are the benefits of paying off your mortgage faster?
Creating long-term financial security for yourself and becoming debt-free is a massive achievement and can make you feel a lot more comfortable during tougher economic climates.
The thing to remember is that interest compounds. When you save money, this means you earn interest on the interest and so on. When you’re repaying a mortgage this works in reverse – the less you owe, the less interest you pay. Simply put, small increases in your regular repayments will have a massive impact in reducing your interest costs in the long run.
Whether your goals revolve around travel, retirement, opening a business or paying for your child’s education, it goes without saying that paying off your mortgage faster means you will be able to fully focus your saving efforts on your other plans.
Speaking of financial goals, saving and budgeting for retirement is a huge focus for many New Zealanders. Expenses add up quickly when you don’t have a regular income, so paying off your mortgage prior to entering retirement is a surefire way to minimise future expenditure and make your retirement savings go further.
Whether you plan to downsize during retirement, leave your property to family or even sell in a few years’ time, the more equity you have (which is the amount you’ve paid off and therefore you own), the more profit you’ll get when you sell your home.
So how do you actually go about reducing your mortgage term? Whether you’ve already purchased your property and are well into your repayments, or you’ve just started your house hunt and want to get prepared, we’ve got practical advice for you at every step.
Doing your due diligence before settling on a mortgage can make a world of difference. Here is how we suggest getting started:
If you’ve already purchased a property, it’s likely that the size of your mortgage has been playing on your mind for a while. Here are our recommendations for ramping up your payments and shedding off some of that interest:
Generally speaking, your first mortgage payment is due a month after closing. The interest you pay is also based on the principal, rather than the amount you borrowed. Therefore, if you reduce the principal before your interest has a chance to accrue, you can save on repayments before you even really start. This depends on the type of loan you get, so it’s best to check with your mortgage adviser first!
Depending on the bank, loan payments can be made weekly, fortnightly or monthly. We generally recommend planning your repayments for the same frequency that you get paid. This can help with budgeting and keep you on track. Increasing the frequency of payments and treating it like other expenses is another way to seamlessly work mortgage repayments into your household expenses.
This one may surprise you, but it’s one of our Chief Squirrel, John Bolton’s favourite tips. Without needing to pay for petrol, parking and repairs, you can save big time and put the additional cash towards your mortgage repayments. You’ll even be helping out the environment at the same time!
Regularly paying a bit more can make a significant difference on the lifetime of your loan. Constantly review your budget and see if there are any expenses you can cut down on. Save that daily coffee from your favourite cafe for retirement!
As soon as you receive a bonus or get a pay rise, pat yourself on the back and then send the additional funds directly towards your mortgage repayments. Staying disciplined and sticking to your budget, regardless of the increase in income, will help you to cut down the debt.
Don’t be afraid of renegotiating your interest rate. Securing a cheaper rate with good flexibility can help you to save big. Not sure how to go about this? Get in touch with your Squirrel adviser if you think you could be getting a better rate.
If you’re on a floating rate, it can be tempting to drop the volume of your payments if interest rates drop. Continuing to pay the same amount will help you out in the long term, especially when the rates rise again. Stay strong!
In some cases (eg if buying with a lower deposit than 20%), there may be fees involved with setting up the loan. If you’re financially able to, it’s always a good idea to pay any fees or charges up front. While you can generally add these to your loan, they’ll also increase the amount of interest accrued. If you can, pay them first!
We can talk for hours about the benefits of paying off your mortgage as fast as possible, but at the end of the day, you should be able to live your life without worrying about money. You should still be able to have smashed avocado on toast every now and then, while being a bit more savvy with your budget.
Another way to help you keep your sanity in check is to break down the idea of your mortgage. When you think about it as a lump sum, it can quickly become overwhelming. But just like anything, if you focus on a small chunk and take it one day at a time, you will see progress. As the old adage goes, how do you eat an elephant? One bite at a time. Take a chunk of $20k or $30k and just focus on paying that off over a couple of years. That suddenly feels like a more achievable goal. Stay positive and celebrate the small achievements along the way.
If your repayments are calculated monthly, choosing to split these into two fortnightly payments is an easy way to help you save. As there are more than four weeks in a month, paying fortnightly could mean that you are paying off an additional month’s worth of mortgage every year, helping you to reduce the principal faster.
When done right, revolving credit is a great way to help you pay off your mortgage faster. Revolving credit is when you put part of your mortgage into your transaction account. Think of it as a large overdraft with the same interest rate as your mortgage. Whenever you have extra money, you can whack it into your revolving credit and the additional funds will mean your mortgage balance is less. Aa a result, you’ll have less interest to pay.
Round all of your mortgage repayments up to the nearest $10 or $50! Every dollar matters in the long-term and rounding up your payments can be an easy way to help you save.
At Squirrel, when we arrange your mortgage we’ll set it up in a way that works with your future goals. So if one of your goals is to pay it off as fast as possible, we’ll help you structure your repayments to do just that. And we won’t stop there; as circumstances change, sometimes your mortgage should too so we’re on-hand to review it, as well as make sure you’re always on the best possible interest rate.