How to pay off your mortgage in record time
Kiwis can and do choose to pay their mortgages off quickly. For some families, the strategy includes starting with a more modest house in a lower-priced part of town, and avoiding the temptation to keep trading up, renovating or extending the home.
Empty nesters willing to downsize to something more modest as their children leave, rather than upgrade again, will also work off their mortgage faster.
In particular, significant alterations on the home can mean burning through money on tradespeople as renovations often end up costing way more than expected. When a growing family means a bigger house, families need to weigh up that can be done without overextending financially.
Josh and Liz Byers’ number one strategy for paying their mortgage off was to buy modestly in the first place. Many of their friends and colleagues bought into expensive suburbs and upgraded whenever they could.
The Byers chose a home in an upcoming Auckland suburb – before prices started to climb.
“If we had chosen another suburb I wouldn’t be having this conversation about paying off the mortgage,” Josh says.
When they bought in 2011, the Byers already knew they would pay the mortgage off early. They gave themselves allowances for non-essential spending in order to have funds available to overpay the mortgage.
Putting a number on the allowance figure wasn’t easy and there was some trial and error in the journey. Josh is a saver, and Liz provides the balancing between saving and enjoying life.
“That’s why the partnership works,” he says.
Josh and Liz had been used to spending what they wanted in their 20s, so the allowance approach was a big change to their lifestyle, but one they embraced.
“We couldn’t just go out and buy new things when we wanted them,” he says. “Our choices changed somewhat.
“There was a lot of decision making around things like holidays and clothing.”
Even something as simple as haircuts had to be factored in. Josh, for example, pays $25 for a haircut, whereas for Liz, a trip to the hairdressers can cost nearer $100.
When each wanted something, such as a new suit in Josh’s case, they worked out how many months’ allowances it would take to pay for the item. This made them cherish their purchases more.
Over and above the allowance, a “fun fund” for date night and basic living costs, the remainder of their income was diverted to the mortgage. Any windfalls or bonuses were paid into the mortgage as well.
The 20-year mortgage was paid off in just seven.
Having the mortgage paid off gives the couple financial and life freedom, says Josh.
“We are not dictated to by our house. We can invest and save for retirement or do certain renovations, and have more flexibility around family plans like education and holidays,” he says.
Unlike Josh and Liz, Carli and David Agnew didn’t have a specific time frame for paying off their home. They knew they wanted to do it as fast as possible and, in the end, their 25-year mortgage was paid off in less than 15.
The couple focused on reducing the outstanding balance faster than required.
“Our budget was living costs, a bit of spending money and the rest we threw on our mortgage,” says Carli. “We never put cars on our mortgage, we never had holidays on our mortgage, and we never did interest only.”
Every time Carli and Russell received a bonus they would make an additional payment on the mortgage, reducing the outstanding principal and the amount of interest they would pay in the long run.
“Most banks give you a certain amount you can pay down every year without incurring penalties,” she says.
Carli says paying the mortgage off felt “really really liberating”. “Paying the mortgage off is the feeling of being unlocked from a noose around your neck,” she says.
How to reduce your mortgage faster
Paying your mortgage down fast is easier if you use tried and tested strategies, says BNZ mobile mortgage manager Shilane Shirkey. Here are her top tips:
1 Increase your repayments by rounding up
If, for example, you had a $800,000 loan over 30 years and your minimum repayment was $901.10 per week, rounding up the repayment to $910 would result in savings of around $22,000 and the mortgage being paid nine months ahead of schedule.
2 Make weekly repayments
More frequent payments will reduce the amount of interest charged and can save you a lot in the long run. For example, weekly repayments on a $660,000 loan could save you around $188,000 (compared to monthly payments of zero savings).
* The savings of $188,000 are calculated on changing the frequency of payments from monthly to weekly. The article stated the payment frequency changing from fortnightly to monthly. The $188,000 savings in total interest paid is based on a variable loan of $660,000, at a 6.23% interest rate, paid in weekly instalments of $1017 per/week. As per the BNZ calculator on March 6, 2019. $188,000 is rounded from $187,965.61.
This assumes the monthly payment is divided by 4 to get the weekly one, so the customer ends up paying a little more in principal each year and therefore can save a significant amount in interest.
For more information please contact a BNZ mobile mortgage manager or home loan specialist to calculate repayments based on your financial situation. Lending criteria, terms and conditions apply.
3 Split your loan
If you split your loan into different types, such as table and tailored, you can work on paying off one first. For example, a $500,000 loan paid off this way in 15 years could result in savings of about $278,000. Some loans have annually increasing repayments, to pay it off faster. When one loan is paid off, move onto the other.
4 Offset your payments
There are accounts which will offset the money in your everyday accounts from your mortgage before the interest is calculated, which means you’re only paying interest on the difference. This can save you a lot on interest and also reduce the length of your loan.
Source: One Roof
Shaan Joshi – Real Estate Agent Auckland
Licensed REAA 2008