Most Kiwis start their homeownership journeys with mortgages of between 20 and 30 years. However, the faster you pay down your home loan, the sooner you can enjoy financial security. And by paying more than your minimum repayments and reducing the length of your loan, you could possibly save thousands of dollars in interest charges.
Below we explore five tips for paying off your mortgage early:
- Check you’re paying a competitive rate
- Pay extra off your home loan
- Make your loan repayments fortnightly
- Make a lump sum payment off your home loan
- Consider a home loan offset account
1. Check you’re paying a competitive rate
One of the easiest ways to help pay off your mortgage faster is to ensure that you’re paying a competitive rate of interest on your loan.
Canstar’s Home Loan Comparison tool features over 60 mortgage products from over 10 providers across New Zealand, and reveals marked differences between the highest and lowest rates on similar mortgages. And every dollar you save in interest is extra cash you can put towards reducing the size of your home loan.
Also, in a competitive market, lenders are often willing to offer preferential rates to good customers. So if you’ve a sizeable deposit, substantial equity in your home, or have a good credit rating, you could be able to negotiate an even lower rate than those advertised.
Don’t be scared to shop around, compare lenders and ask for a better deal.
Compare with Canstar for the Lowest Mortgage Rates
One of the best places to start your hunt for the lowest mortgage rate is Canstar’s home loan database, ratings and awards. Not only can you compare 245 different mortgage products from 11 lenders, you can discover which loans and lenders earn Canstar’s top awards for value and service, as judged by our expert research panel.
The table below displays some of the 1-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for home owners. This table is sorted by current interest rates (lowest to highest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.
2. Pay extra off your home loan
The math is simple: the larger your repayments, the quicker you’ll pay off your mortgage debt. If you can afford to increase your regular repayments, even by a small amount, it will help reduce your mortgage term and could considerably cut the amount you pay in interest.
For example, if you take out a $400,000 mortgage, over 30 years at a fixed rate of 6%, your monthly repayment will be $2398, and over the life of the loan you can expect to pay $463,353 in interest.
However, by paying an extra $100 per month, you could cut three years off the life of the mortgage and save $55,759 in interest repayments.
It’s worth noting that while there are usually no restrictions on making extra repayments on loans with variable rates, if you’ve a fixed-rate mortgage, limits on your extra repayments and fees could apply.
So if you do plan on making extra mortgage repayments, it could be a good idea to discuss your plans with your lender or broker to ensure you’re matched with the right loan for your repayment plans.
3. Make your loan repayments fortnightly
One method of increasing your mortgage repayments, which will really help to pay down your mortgage faster, is to increase the frequency of your repayments from monthly to fortnightly.
If you make your mortgage repayments monthly, you’ll have 12 repayments every year. However, if you switch to fortnightly, you’ll increase your repayments to 26 per year. This equates to making an extra monthly repayment every 12 months, which can lead to considerable savings over the course of a 30-year mortgage term.
To use our example above, by switching the repayments from monthly to weekly, the extra repayments would reduce the loan term by over five years and save a whopping $99,248 in interest.
However, there is a caveat to this method of paying off a mortgage faster, as it depends on how a lender works out the difference in their monthly and weekly repayments.
To save money by paying your mortgage every two weeks, the fortnightly repayment sum has to be half the standard monthly repayment amount, not just the total of annual repayments divided by 26 fortnights, which will lead to no interest savings.
4. Make a lump sum payment off your home loan
If you receive a lump sum of cash, for example as bonus from work or a tax refund, instead of splashing out on an expensive purchase, paying off an extra portion of your home loan could be a more financially sensible option.
Indeed, if you’ve got any extra savings sitting in a term deposit or high-interest savings account, it’s worth considering the amount you could save by using that money to pay off your mortgage faster.
Once again using our example above, if you made a lump sum payment of $6000 three years into your 30-year term, you could save approximately $23,356 in interest and shave a year off the life of your mortgage.
5. Consider a home loan offset account
Rather than have money sitting in transaction accounts earning a small amount of interest, you could use that cash to help pay off you mortgage faster by offsetting those funds against your mortgage.
An offset account is a transaction account linked to your home loan. Any money in the offset account reduces the home loan amount on which you pay interest.
For example, if you have $20,000 in an offset and a mortgage of $400,000, you will only pay interest on $380,000 of the loan total.
Even if you don’t have a huge amount of spare cash sitting unused in your accounts, general monthly cashflow and salary payments can help reduce your mortgage interest repayments and aid in shortening your mortgage term.
It’s worth noting that offset accounts vary between mortgage lenders. For example, some charge a monthly fee, while others allow multiple accounts to be offset against a home loan.
Also, offset accounts are usually only offered on variable rate home loans. And as variable rates are usually higher than fixed rates, you need to ensure that you offset enough of your mortgage to make savings.
As always, it’s a good idea to thoroughly check and review your mortgage product choices.
Ultimately, if you’re serious about paying off your mortgage faster, making extra repayments and tools such as offset accounts can help you towards your goal. For advice tailored more precisely to your financial needs, you could also consider talking to a financial adviser.
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About the author of this page
This report was written by Canstar’s Editor, Bruce Pitchers. Bruce has three decades’ experience as a journalist and has worked for major media companies in the UK and Australasia, including ACP, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.
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