Zooming ahead on loans
A heartening picture of progress towards debt freedom has emerged from Westpac.
It says two-thirds of its customers are ahead on their mortgage payments by three months or more.
Owning a house is a costly business, both in time and money, so paying more than the minimum the bank demands takes commitment.
Very few homes are as their owners would like them. There’s always something else to spend money on that would get it closer to the way you want it, not to mention that money you have to pour into keeping them maintained.
Getting ahead on the mortgage may mean making choices like putting off that new bathroom, or maintaining a frugal lifestyle, even while the capital gains machine you call home is enriching you.
What Westpac found was that around the country, those people ahead on their homes loans had paid between $3319 (West Coast) and $11,146 (Nelson) more than they were contractually obliged to.
Low interest rates and high employment have made the past 10 years a great time to get ahead on the mortgage, though post-earthquake insurance premium rises have taken a big bite out of homeowners’ incomes. Averages are always a bit misleading. In Nelson, there will be people $30,000 ahead, and some only $3000 ahead.
I reckon $3000 a year isn’t bad over 10 years, while $300 a year isn’t what I’d call life-changing.
Not only do each of us have to battle
GOLDEN RULES
Consider emulating Westpac’s super repayers Balance lifestyle with your savings goals Set you level of mortgage ambition temptation to spend, but we also have to battle our own natures.
Some of us are risk-averse, and draw immense satisfaction and a sense of security from retiring our debt
Others are more comfortable with carrying debt, or have different plans for getting shot of the mortgage, such as owning a rental with the ultimate aim (don’t tell the Inland Revenue) of selling it, and going debt free.
Westpac found many people were choosing to mix and match fixed home loans with floating ones. The fixed loans gave them some certainty of costs in the future, while their floating loans carried no penalties for paying them off faster than the bank demands.
The thing about floating rate home loans – and especially revolving credit home loans – is that they turn every spending decision into a decision about the mortgage.
Suddenly the cost of that Nespresso Lattissima machine is the $750 you pay Farmers as well as the $500 interest on carrying an extra $750 on the mortgage for the next 20 years, not to mention the cost of coffee capsules.
The same goes for everything from little Jane’s piano lessons to upgrading the car.
Roughly-speaking, an extra dollar paid off the mortgage today saves you 70 cents in interest over 20 years.
On its own, that 70 cents isn’t much, but $500 extra paid off each year quickly adds up to a small fortune.
So consider what your level of ambition is, and get going.