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How to pay off the mortgage faster
With the recent drop in the official cash rate New Zealanders are presented with some of the best conditions for paying off the mortgage faster.
If you’ve ever wondered how to achieve this, here’s your chance to get started.
With interest rates so low, home owners have a real opportunity to make a good dent in their mortgage. Just think of the doors this could open up for you – perhaps it is heading into retirement mortgage-free, retiring early, or allowing you to build more equity in your home that could enable you to get into a new business or build a rental property portfolio. Or more simply, it could just save you thousands (often tens of thousands) in interest over the course of your loan.
While every case is different (and decisions should be made with sound professional advice), our mortgage advisor Steve Davies outlines some of the things to be considered when trying to take chunks off the mortgage.
There are three key steps in this exercise:
- First you need to decide why you want to reduce the mortgage term – what is your end goal? Is it to be mortgage free in a certain period of time? To move up the property ladder, perhaps into a bigger home? To buy a rental property? This will greatly determine which path is right for you. Believe it or not, there may be advantages in not paying off the mortgage faster!
- Take a good look at your budget. Know your cost of living and how much you are spending. Also, know yourself and how financially disciplined you are prepared to be. What are you realistically prepared to sacrifice? Only then can you make decisions on the best course of action.
- Get professional advice from a good mortgage advisor, which includes making a plan. Once you have a solid plan you can trust in it, and that shreds a lot of stress!
So, once you’ve decided you definitely want to start taking some big chunks off your debt, you can start thinking about how to go about it.
Other than coming into a windfall (lotto, anyone?!), here are the main ways to pay off the mortgage faster:
- Break your fixed term. Penalties will apply, but if you are fixed on a high rate there may be savings over the long term for breaking and re-fixing at a lower rate. It can certainly be worth weighing up the pros and cons here.
- Switch banks. Again penalties will apply (even if you’re not on a fixed rate, there will still be legal costs to factor in), plus most banks are incredibly competitive on their rates right now. You would really need to see a strong advantage here. But if your bank isn’t offering you the best rate, it could be worth shopping around.
- Restructure the debt. Do you need a Table, Revolving Credit, or Interest Only loan? Different structures will work for different situations. Our mortgage advisor can assist with structuring your lending to the best advantage for you.
- Pay off/consolidate your high interest debts FIRST. Any other debts you have on higher interest rates (like credit cards and personal loans) are often around 19 – 25% interest. Consolidating these debts has two advantages – 1) instead of paying these off as well, you are freeing up your cash to be able to put on the mortgage instead, and 2) you are saving in higher interest – sometimes this can be a difference of 15 – 20%, which adds up very quickly.
- Review your outgoings. See if you can squeeze anything out of your budget that could go on the mortgage instead. Are you paying too much for power or internet perhaps? Could you sacrifice a few cups of coffee or trips to the bakery? Even if it’s another $10 per week, it will still help to reduce your debt sooner.
If you’ve given this some thought and are ready to take action, doing some quick calculations and having a chat with our professional mortgage adviser is a good start. Whatever you do, be sure you don’t put yourself under too much pressure – if you’re not in the position to make higher payments, sometimes keeping the status quo is the best thing to do – and our mortgage adviser Steve Davies will give you honest advice if that’s the case.