Buying your dream house can be one of life’s momentous achievements, and it comes with quite a bit of legwork. If you’d like to make the most of your purchase, then having a strategy for repaying your mortgage faster is crucial.
Remember, the longer your mortgage term lasts, the more interest you will pay on it over time. So here are some tips for getting closer to your mortgage-free day.
Affordability is one of the first things to consider when buying a house. When assessing your finances, the lender will give you an indication of your maximum borrowing capacity – but that doesn’t mean you need (or should) borrow the entire amount available to you.
The key thing is to borrow what you can comfortably afford to repay over time, even if interest rates were to increase at some point. According to economists, lower-than-ever interest rates will rise again shortly, so it’s a good idea to factor in a potential increase right from the onset.
To have a helpful start on your homeownership journey, make sure you scan through your monthly budget and crunch the numbers with mortgage repayments. As mortgage advisers, we are here to help you understand your financial situation more clearly and take out a loan that suits you in the long-term.
When you make your mortgage repayments, they are applied to two things: the principal, and the interest. Over the first few years of your mortgage, much of your repayment is applied to interest, and a much smaller amount of the total regular payment to the principal. And you might find that your principal isn’t reducing by much.
A key way to pay off your mortgage faster is prioritising repaying the principal. Paying any amount above the minimum required repayment amount in those early years can eat into your balance, reduce the length of the loan term, and save you interest over time. Like to know how?
Like we said, every time you add a little extra to your minimum mortgage repayment amount, you reduce your principal. So, it can be quite helpful to wisely use any extra money you might make over your base income, towards paying off your mortgage. Some less thought-of income sources can be:
Focusing on paying off your debt is a key financial goal, whether you just have a mortgage or other high-interest debt as well. It can help free up money in your budget for other things, like saving for retirement. So whenever you have some extra cash in your pocket, make sure you think about how you can put it to good use.
The power of sound budgeting cannot be overstated. Budgeting has multiple compounding benefits, like:
A regular review of your budget might help create some room to save even an extra $20 a month. Every dollar counts, so even a small increase in your regular repayment amounts can make a difference to your mortgage term over the long run.
Let’s say you have a 30-year mortgage of $250,000, currently fixed at 5 per cent interest, and have 25 years left on the mortgage. You would currently pay $1,342.05 per month. Even if you find an extra $20 a month, it can shorten your repayment period by eight months and save you $5,722 in interest.
Finally, having some inspiration can go a long way towards your goals. There are success stories abound on the internet, of Kiwis who have tried the more atypical, creative routes to paying off their mortgage faster. Like this couple who changed their lifestyle, made sustainable choices, and paid off their 20-year mortgage in just seven. Seeing others trying different things and finding what they might have tried, might just help you on your own journey.
Get in touch - when it comes to paying off your mortgage faster, everyone has unique needs and financial goals. So, it helps to have a professional in your corner to help navigate these decisions. As financial advisers, we are committed to helping you and your family with your mortgage needs. Please don’t hesitate to get in touch.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.