How to Pay Off Your Mortgage Faster and Slash Your Home Loan

by | Jul 4, 2024 | Mortgage News

Are you ready to break free from the chains of your mortgage faster? Imagine relaxing by the pool instead of watching your interest pile up. Paying off your mortgage faster can save you thousands in interest and bring you that sweet financial peace of mind.

We’ve got 10 tips below to help you repay your mortgage faster. A mortgage calculator is also helpful to play around with, showing you potential savings and how small adjustments can make a big difference. 

So, let’s explore ways to pay your home loan faster and reduce interest, ultimately, saving you money.

Table of Contents

  1. 10 Tips to Repay Your Home Loan Faster
    1. Make Extra Mortgage Payments
    2. Change Your Repayment Frequency
    3. Use Lump Sums Wisely
    4. Maintain Repayments When Interest Rates Drop
    5. Split Your Mortgage Between Fixed and Floating Rates
    6. Negotiate a Lower Interest Rate
    7. An Offset Account Can Help Pay Off Your Loan Faster
    8. Avoid adding fees to your loan
    9. Make your first payment immediately
    10. Review your spending regularly
  2. How The Right Type of Mortgage Can Help Pay Off Your Loan Faster
    1. Interest Rates and How They Affect Payments
    2. Principal Versus Interest Components
    3. Loan Terms and Conditions
  3. Managing Additional Costs
    1. Understanding Loan Fees and Charges
    2. Minimising Interest and Bank Fees
  4. Our Professional Mortgage Brokers & Financial Advisers Are Here to Help
    1. Preparing a Mortgage Repayment Checklist
  5. You’ve Paid Off  Your Mortgage – What Happens Now?

10 Tips to Repay Your Home Loan Faster

Here are some actionable ways to help pay your mortgage early:

Make Extra Mortgage Payments

Increase your regular payments beyond the minimum required. Many New Zealand banks allow you to increase repayments by up to 20% above the minimum without incurring penalties. Another example is ASB, which permits customers to increase their fixed mortgage repayments by up to $500 per fortnight without incurring fees. To implement this, set a goal to add a fixed extra amount to each payment. Consider automating this process to ensure consistency.

Change Your Repayment Frequency

Switch from monthly to fortnightly payments. This results in 26 half-payments per year, effectively making an extra mortgage payment annually. In New Zealand, your mortgage interest is calculated daily based on the outstanding loan balance. The more frequent your repayments are, the less interest you’ll pay.

Use Lump Sums Wisely

If you receive a bonus, tax refund, or inheritance, consider putting it towards your mortgage. I know it can be tempting to spend it on a new flat-screen TV, but trust me, watching your mortgage balance shrink is way more satisfying than binge-watching Netflix.

Maintain Repayments When Interest Rates Drop

If you’re refixing at a lower rate, keep your repayments at the same level as before. The extra money will help you repay your loan principal faster. Likewise, if you get a pay rise, put the extra toward your mortgage. 

Split Your Mortgage Between Fixed and Floating Rates

Split your mortgage between fixed and floating rates. This allows you to take advantage of market fluctuations and potentially make extra repayments on the floating portion without penalties.

Negotiate a Lower Interest Rate

When your fixed mortgage term is up for renewal, shop around or use a mortgage broker to negotiate a better rate loan. A lower interest rate means more of each payment goes towards the principal balance, allowing faster repayment. Even a small reduction can save thousands in the interest you pay over the life of your loan.

An Offset Account Can Help Pay Off Your Loan Faster

If your bank offers this feature, link your savings or transaction accounts to your mortgage. The balance in these accounts will be offset against your mortgage, reducing the interest you pay. Our blog post on revolving credit vs offset loans offers further advice on this.

Avoid adding fees to your loan

Pay any mortgage-related fees upfront rather than adding them to your loan balance. This prevents you from paying interest on these fees over the life of your loan. It all adds up!

Make your first payment immediately

If possible, make your first mortgage payment on the day you settle. This can save you around $1,000 over the term of your loan by reducing the principal from day one.

Review your spending regularly

Find areas to cut expenses and redirect that money to your mortgage. Even small, consistent increases in your repayments can make a significant difference in the amount of interest you’ll pay over time.

How The Right Type of Mortgage Can Help Pay Off Your Loan Faster

There are various types of home loans available to borrowers, and our Auckland mortgage brokers are here to help you find the right loan type for your circumstances. Options include:

  • Table Home Loans: The most common type of mortgage in New Zealand. Repayments include both interest and principal, with a term of 30 years.
  • Fixed Rate Home Loans: The interest rate is fixed for a set period, typically from six months to five years.
  • Floating (Variable) Rate Home Loans: Interest rates can change based on market conditions.
  • Revolving Credit Mortgages: These work like large overdrafts, where your income goes directly into the account, and bills are paid from it.
  • Offset Mortgages: Links your mortgage to savings or everyday accounts, reducing the amount of interest you pay on your mortgage.
  • Interest-only mortgages: You pay only the interest, not the principal. These are often used for short periods or for investment properties.
  • Split Mortgages: A combination of fixed and floating mortgage rates, allowing for stability and flexibility.
  • Reducing Balance Home Loans (Straight Line Loans): These are less common in New Zealand. Equal principal repayments are made over the loan term, with interest decreasing over time.
  • Capped Rate Mortgages: A variation where the interest rate can’t rise above a certain point but can drop if floating rates fall (rare in New Zealand).

Each type of mortgage has its pros and cons, which can affect your overall payment strategy. Our experienced mortgage brokers can help you choose the right loan structure for your circumstances.

Interest Rates and How They Affect Payments

Interest rates determine your monthly mortgage payments and the long-term cost of your loan. If you have a fixed interest rate, your payments will stay the same every month. This predictability can help with long-term financial planning.

A floating rate, on the other hand, means your interest rate can change periodically. This could result in lower initial payments, but there’s a risk of rates increasing significantly. We’ve seen this over the recent years with the official cash rate being as low as 0.25% in 2020. As at May 2024, the OCR is 5.5%.

The impact of interest rates extends beyond monthly payments. Higher rates mean more money goes towards interest rather than reducing the principal. Understanding this can help you choose between loan options and manage your repayments more effectively.

Principal Versus Interest Components

Each mortgage payment consists of two components: principal and interest. The principal is the amount you originally borrowed, while interest is the cost of borrowing that money.

In the early years of a mortgage, your payments are largely composed of interest. Gradually, as the principal is reduced, a larger portion of your payments will go towards paying down the principal. This process is known as amortisation.

By making extra repayments, you’ll pay your loan faster and pay less interest over time. This can significantly shorten the lifespan of your mortgage and save you money in the long run.

Loan Terms and Conditions

A loan agreement contains the terms and conditions of your mortgage. This includes the loan amount, interest rate, repayment schedule, and any fees and penalties. 

Some key terms to understand include prepayment penalties, which are fees you might incur if you repay your home loan early. 

Knowing the details of your loan agreement can help you avoid unexpected costs and make more informed decisions about extra repayments or refinancing options. Carefully read through your agreement and consult with our mortgage advisers if you have any questions.

Fortnightly repayments reduce the interest charged on your principal balance. Discuss this 

option with your lender to ensure there are no hidden fees or early repayment penalty.

Managing Additional Costs

Effectively managing additional costs can significantly accelerate the process of paying your loan off faster. By understanding loan fees and charges, and minimising interest and bank fees, you can reduce your overall debt and make more efficient repayments.

Understanding Loan Fees and Charges

Understanding loan fees and charges is essential to managing your mortgage repayments. Loan establishment fees, legal fees, and ongoing service fees can add up over the life of the mortgage.

Paying these upfront from your savings, rather than adding them to your loan, can prevent interest accumulation on these amounts. Reviewing your loan documents and discussing the fee structure with your lender can help clarify any unexpected charges.

Furthermore, some lenders might offer the option to refinance your home loan to a different package with fewer fees. Regularly assessing your mortgage against current offers in the market can lead to significant savings over time.

Minimising Interest and Bank Fees

Minimising interest and bank fees can have a large impact on your total mortgage cost. One effective strategy is to increase your minimum repayment amounts. Even small additional payments can lead to substantial interest savings over the life of your loan. For example, paying an extra $50 every fortnight can save you thousands in interest.

Another approach is to make one-off payments whenever possible. Lump sum payments from bonuses or tax returns directly reduce the principal amount, thus decreasing future interest.

Keeping an eye on interest rates can also help. When rates drop, continue paying the same amount as before. This accelerates your repayment progress without increasing your financial burden.

Finally, consider switching to a mortgage with lower fees. Comparing different loan packages and refinancing if necessary can lead to significant cost reductions.

Our Professional Mortgage Brokers & Financial Advisers Are Here to Help

Professional advice can significantly influence your mortgage repayment strategy and help you pay off your home loan faster.

At OneStop Financial Solutions, we’re qualified financial advisers and mortgage brokers. We can help create a tailored plan that aligns with your financial situation and goals, help choose a home loan that’s right for you, and discuss mortgage payoff strategies. 

Preparing a Mortgage Repayment Checklist

  1. List Fixed and Variable Costs: Document all your monthly financial obligations, including utilities, groceries, transportation, and loan repayments.
  2. Calculate Disposable Income: Determine how much money is left after covering all essential expenses. This will give you an idea of how much you can afford to increase your mortgage repayments.
  3. Set a Budget for Extra Repayments: Determine a realistic amount that can be consistently added to your regular repayments to fast-track your mortgage reduction.
  4. Analyse Interest Rates: Ensure you have the best possible deal by consulting with a mortgage adviser to negotiate a lower interest rate.
  5. Monitor Progress: Regularly check your mortgage account to assess progress and adjust as needed.

By following this checklist, you’ll be better prepared to tackle your mortgage effectively and efficiently. Employing a structured approach ensures that your efforts are both practical and sustainable in the long term.

You’ve Paid Off  Your Mortgage – What Happens Now?

When you’re ready to make the final repayment, confirm the exact amount needed to settle your mortgage. This includes any outstanding principal, accrued interest, and applicable fees. Contact your lender in advance to obtain this information.

Scheduling the payment for the settlement date is crucial. Ensure that the funds are available in your account to avoid any last-minute complications. It’s also wise to double-check that no early repayment charges will be applied.

On settlement day, coordinate with your lender and any other parties involved. Once the final payment is processed, the lender will discharge the mortgage and release the property title to you. Make sure to obtain a copy of the discharge documents for your records. This step signifies that your mortgage is officially closed, and you fully own your home.

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