CLEAR YOUR MORTGAGE FASTER
Unless you’ve got a serious credit card problem, the mortgage is the biggest debt for most of us.
Mortgages have rocketed up alongside house prices, with many people now in staggering debt.
But the good news is there are strategies to help you pay it off faster. The place to start is simply biting the bullet to pay off more than the bare minimum.
Even if you only have a little extra, it can make a big difference. When you put an extra $20 on your mortgage, it’s actually not just $20.
You’re paying off every skerrick of interest that $20 would have cost you over 30 years of a mortgage.
You’re practically earning money, as you never have to pay off the money that debt would have cost you.
The standard mortgage in New Zealand is a ‘table mortgage’ — you borrow a certain amount and agree to pay it back with interest to the bank.
But the interest is all piled at the beginning. For the first few years, you’re barely paying off the money you borrowed.
So anything you can pay extra is your golden ticket; that extra goes straight on to the principal (the amount you borrowed in the first place) and wipes out a lot of the interest that you’re being asked to pay now.
The pros have some tricks to make those extra payments easier.
On the Cooking the Books podcast I asked Mortgage Lab’s Rupert Gough and AUT associate professor Aaron Gilbert for their best tips for paying off the mortgage, in an environment where interest rates have hit rock bottom.
Gough says that you should always stress-test yourself before applying for a mortgage anyway. Sure, mortgage rates are low now, but that means they can only go up in the future.
Gough says that before committing to a 4 per cent mortgage, you should check whether you could also afford it at 8 per cent. If you could, then why not pay it at that rate anyway?
If you can almost afford that 8 per cent, but not quite, then maybe make plans for how you could get a pay rise.
Get that pay rise, then slap it straight on the mortgage. You didn’t miss it before, so why not put it to work for you, rather than being sucked in by lifestyle creep.
Gilbert did a rough, back of the envelope calculation, based on average figures.
He says an extra $5000 paid in the first year of your mortgage can cut one year off your mortgage.
That’s just under $100 a week, which might sound like a lot. But if you’re in a relationship, that’s $50 each. If you have two flatmates, that’s $25 extra from each person’s contribution.
Who you bank with changes how you make that extra contribution. Some will let you put extra repayments in as long as it’s under 5 per cent, while others will want you to save it up to pay off in a lump sum when your fixed rate comes to an end.
Whichever strategy, keep doing that for well past the first year of your mortgage — slashing year upon year off the time that you’re paying off your house.
A little adds up to a lot.
— Frances Cook is the host of the personal finance podcast Cooking the Books. She is not a financial advisor, and all information is general in nature. For individual advice, see a financial advisor. Listen to her podcast on OneRoof.co.nz