An eye watering mortgage is a reality for many homeowners across New Zealand. With a 20 percent deposit to buy a house and the rest on loan, with repayments spread across 30 years, many Kiwis pay the minimum – but there are benefits to putting extra cash towards your mortgage.
Budgeting the monthly or fortnightly mortgage repayments is a reality for many homeowners but putting in a few extra dollars towards your mortgage can potentially save you thousands of dollars.
When you consider the interest rate and the length of your mortgage, every single extra dollar paid into your mortgage will roughly save you as much again in interest, Mortgage Lab broker Rupert Gough told OneRoof.
Each dollar you put towards your mortgage will reduce the length of time you spend paying it off, once you understand this you will appreciate how a little bit of extra money on your mortgage today can make a significant difference.
“You can say to people ‘pay off your mortgage’. But if they don’t really appreciate the benefit of it, you’re fighting a losing battle. Typically for every dollar that you put on your mortgage; you roughly save that amount again on interest. That makes it easy when you think: ‘should I spend $30’ on something when it’s actually costing me $60?’” Gough said.
Although there is no trick to it, being a little obsessive compulsive towards your mortgage repayments can really pay off.
Here are some strategies to help dry up your mortgage:
Every dollar counts
While many mortgages have limitations on extra payments without penalties, it may be worthwhile to set up a new bank account where you can start putting away a few dollars each day or week to work towards a significant lump sum payment. Each day you decide to skip that barista fresh coffee, or the service station pie and any other ‘unnecessary’ spending, put that money aside to go towards your mortgage. It may not seem like a lot of money, but over a month, year, or 30 years that amount will balloon.
Alternatively, at the end of each day, you could round the balance of your account down to the nearest $10 and transfer that sum towards your mortgage. When you come in under budget, transfer those extra funds across too.
Thoroughly examine your spending
When we go through our regular budget, the majority of New Zealanders could find some spare money if they have tracked their income to spending effectively. Despite extra costs on regular items, a lot of the purchases we make are not essential. When you think about what you put in your supermarket trolley, how much of it is necessary, and how much of it is likely to end up wasted? When you identify those areas you can save, that extra cash can be diverted to your mortgage.
“There is a dose of reality that you can live on rice and soy sauce,” Gough said. “You have to enjoy yourself at some point. But the thought [of doubling money] might help in terms of making last-minute decisions about spending. If you could double that money by putting it on the mortgage, would you still buy that thing?”
Understand your expenses
Go through your bank statement each month and make sure you are aware of what charges are being made on your credit card. Micro subscription services are easy to stack up, like Netflix, Amazon Prime, Spotify, Apple Music, My Food Bag and many more. With all the micro subscription services available, there are bound to be a few unnecessary ones you can click the unsubscribe button on.
Channel pay rises to your mortgage
It is easy to splash out and change your lifestyle when you get a pay rise, and your ‘needs’ expand when you have extra cash. If you maintain your current lifestyle and direct a large portion of that pay rise to your mortgage, it will make a major dent in reducing debt.
Set goals and rewards
Mortgages are not seen as something fun but turning it into a game could help you get closer towards paying it off.
It could be something as simple as setting up a system where you get a treat for each additional $1,000, $10,000 or $100,000 you pay off over and above your minimum payments. You don’t need to spoil yourself silly, but if you reach the realistic goal you set, you could treat yourself to dinner.
“One mind game that we try to get clients to do is to calculate what their mortgage payments would be at 8 percent,” Gough said. Clients work towards making payments at that level. “It protects them from future interest raises and pays down their mortgage more quickly in the meantime.”
Instead of committing to 30 years of regular repayments, those small extra payments and increasing your regular contribution can drastically reduce the number of years you are paying off your mortgage.
“If you have a 30-year mortgage, based on an $810,000 mortgage at 5% that is $1000 a week. Increasing that by $100 per week to $1100 brings the term down to 25 years and saves you $150,000 in interest,” Gough said.
Depending on your bank and the terms and conditions that go with your mortgage, there may be penalties to detour you from paying above your regular, minimum repayments. It is best to discuss with your bank or mortgage broker about your different options that can help you pay down your mortgage faster.
Share
