An extra $20 a week could knock 5 years off your mortgage, All things property, under OneRoof

An extra $20 a week could knock 5 years off your mortgage

Cut debt to start a fresh new decade.

After the Christmas binge comes the reflection of the new year.

A new year has a way of making us acutely aware of the passage of time, and that time truly is money.

That’s particularly true when it comes to debt. So if you’re searching for a new year resolution, I suggest making it to get out of debt.

If you never do anything else with your money, busting debt will be something your future self will thank you for over and over.

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In New Zealand, we have a bit of a problem with debt. Last year, Fitch Ratings reported our household debt levels were 93 per cent of GDP, making us one of the worst in the world.

Any time you use debt you’re paying more than you would for the exact same thing. You pay the ticket price, and then you also hand over fees and interest to other companies, just for the sake of it.

For instance, take your standard 30 year mortgage. If you pay off your basic requirements over that time, you’ll pay about double the buying price of your house.

Scroll down to listen to Frances Cook's Cooking the Books podcast series

Once to actually pay off the house. The rest is all the interest to the bank.

The worst part is, a mortgage is a fairly cheap way to borrow money. If you’re spending years enslaved to your credit card or car payments, you’re paying hundreds or thousands of dollars more than the tag price for what you bought.

Just think about what that extra money could be buying you instead. A trip to Paris. A dinner with friends. A new investment for financial security.

But that extra money isn’t locked in. You don’t have to give it away to big banks and credit companies. And you shouldn’t.

The faster you pay it off, the less you’ll pay. An extra $20 now could save you $40 later.

So even though it’s summer, we’re going to talk about avalanches and snowballs. Because they’re the clever tactics to get you out of debt faster.

If you want to avalanche, you make the minimum payments everywhere and then focus all your extra money on the debt with the highest interest rates and fees.

If you were a robot, that would be the only way to pay off debt. You’ll save the most money overall and be out of debt faster.

But if you need more motivation to stick with it, then it’s time to snowball.

You make the minimum payments on everything, and then pay all your extra cash onto the smallest debt at a time, sniping them out one by one.

You get the thrill of success to keep you going.

It’s crazy how much a small amount extra can help you. I once put just $20 a week into a mortgage calculator, to see how much it would knock off my repayment time.

That $20 a week knocked off just under five years.

If my husband matched me, and we put in $40 a week extra, that cut off eight years, down to a 22 year mortgage.

Put it another way, that cuts out a quarter of our previous repayment time.

It’s all thanks to compound interest. Every extra payment wipes out all of the interest you would have paid on it too. $20 is far more powerful than just $20.

So this new year, attack debt. Start a new decade with a weight off your shoulders.

- Frances Cook is the host of the personal finance podcast Cooking the Books. She is not a financial adviser, and all information is general in nature. For individual advice, see a financial adviser.

Listen to Cooking the Books podcasts below:

How money can be used to abuse

Housing is now a different game from the beginning of 2019

Should you buy a house with your friends?

How to make more money by being lazy

After an investment property? Time to think commercial

How to budget for a house deposit without depriving yourself

How first-home buyers can build their own unique solution

Could the rule of 100 turn around your fortunes?

Is NZ ready for first-home buyer landlords?

The tough talk you need to have when saving for a house

How to house hack your way to smaller household bills