Should you set a goal to repay your home loan early?
We’re going to take a look at the different types of home loans available in New Zealand, tips to save you money on your mortgage and help you figure out the best way to make extra repayments on an existing bond to save thousands!
Whether or not repaying your home loan early is a good idea for you depends on your individual financial situation and goals. Believe it or not, there are certainly situations in which making extra payments or repaying your bond early will not make financial sense.
Understanding how a home loan works
Fixed vs floating rates
Fixed rate home loans offer a fixed interest rate for a set period of time. A fixed interest rate simply allows for better budgeting and financial certainty.
The downside to fixed rate interest rates is that should there be a drop in interest rates you will not be able to enjoy any savings from this drop. If you choose a fixed rate home loan, chances are that you will incur penalty fees if you attempt to repay your home loan early.
On the other hand a floating interest rate goes up and down along with the rate set by the Reserve Bank of New Zealand. Although your repayments may vary, this is the more popular option and can save you money in the long run. The disadvantage is that if the rates go up you will have to pay more according to this increase.
Home loan terms
Home loan terms rage from 20 to 30 years and it is this long loan term that makes the mortgage provider their money. This is because interest, however low it may be, will be charged over a very long period of time.
Generally speaking, such a long loan term will generally result in you paying off double or more than the initial principal loan amount...yes double!
For instance if we take out a mortgage of $400,000 over a 30 year period at an interest rate of 6% we will end up paying a total of $863,353! This means you essentially pay $463,353 in interest alone!
Types of home loans in New Zealand
The type of home loan that you choose will have a significant effect on how much you end up paying overall and is a very important factor if you’re considering repaying your home loan early.
Offset mortgages
Offset mortgages allow you to use money in a savings account to offset the amount of interest that you pay. As an example if your home loan is sitting at $300,000 and your savings account is carrying savings of $20,000 you will only have to pay interest on the balance of $280,000.
Revolving credit mortgages
This type of home loan allows you to credit your salary to your home loan account and pay bills and other expenses directly out of your home loan account. Your salary will help reduce the balance in your mortgage account and this will save you money.
Reducing loans
These are loans where you pay a set principal amount with each repayment but the amount of interest lessens as time passes.
Table mortgages
Table mortgages are one of the more common options and is structured in such a way that most on your repayments early on after you take on the loan will pay off your interest but, as you advance in the loan term, you pay more and more towards the principal.
It is important to remember that you can also choose a combination mortgage that features multiple benefits that will suit your financial situation and goals. For instance you can choose a mixture between a fixed and floating rate mortgage.
Generally this will only be a good idea if you’re looking to make a set payment towards your bond every month but want to have the option of making extra payment should you wish to do so.
10 Tips to pay off your mortgage faster
- Before buying a property try to save for a deposit, this will save you a lot of money in the long run.
- Consider an offset mortgage that is linked to your savings account as your savings will then reduce the amount on which you are paying interest and this can make a huge difference.
- Revolving mortgages allow you to put your salary or wages into your home loan account and reduce the amount on which you are charged interest.
- Always try to pay more towards your bond on a consistent basis, 20% is an excellent amount as this is generally the additional repayment percentage that will ensue you’re not charged any penalties.
- If you have your finances under control and have extra cash to spend, consider contacting your loan provider and asking them to shorten your loan term, this will save you thousands!
- If you have a floating rate mortgage, add extra lump sums of cash into your bond account as and when possible, (perhaps using your end of year bonus?)
- If you have a floating rate mortgage and the interest rates drop, do not make lower installments, keep your payments the same.
- Always review your loan ever so often, you may be able to restructure the loan or negotiate better rates and terms if the market has shifted but keep in mind that restructuring may end up costing you money.
- With regard to all the extra costs that you incur when purchasing a property, always ensure you pay these upfront rather than including them into your mortgage, this will save you a lot of money.
- If you enjoy an increase in pay, consider using this extra money, or a portion of it, to make additional payments towards your home loan.
Finally, always make use of the many mortgage calculators online to see exactly how much just small additional payments or a small reduction in your loan term will save you overall. You will, without a doubt be pleasantly surprised!
Repaying your mortgage off early is almost always a good thing and will save you thousands but, this requires a lot of discipline and is generally an exercise that those who are well organised and finally savvy can do without any hiccups. That being said, if you set your mind to make extra payments and repay early, you certainly can and will be able to!
