Paying down the mortgage aggressively in the first couple of years can lead to huge savings over the lifetime of the loan.
And financial experts believe it's sometimes better for new homeowners to use the money they might have earmarked for a renovation to reduce their mortgage.
Rupert Gough, CEO of mortgage advisers Mortgage Lab, says: “Let’s say you can pay a $1000 off - that’s $1000 that each year would have had interest put on to it.”
But if you can’t pay aggressively in the first few years, don’t be put off because any time is a good time to pay down the mortgage, he says.
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The trick is finding out how your bank will allow extra payments.
“Some allow a lump sum, some you can increase the payments, so the trick is to make that work with how you get money, so if you’re self-employed you might prefer to pay lump sums and if you’ve got a pay rise you’d increase your payment.”
Gough says if you are planning renovations you could think about whether they are going to add value because it may be the money is better spent on the mortgage.
“For example, we estimate if you pay about $1 off your mortgage you’re saving about $5 over the 30 years of your mortgage in terms of interest, so that $1000 you put on saves you about $5000 in interest. It’s big numbers that you’re talking.”
Mortgage Lab tries to get clients to pay off the mortgage as though the rate was 8 per cent, which on a $700,000 mortgage with today’s 3.5 per cent rate could save around $30,000 in interest a year.
“If you can get your head around what would my mortgage look like at 8 per cent and how can I get my money to stretch that far then you’re going to have a lot of buffer in the next five to ten years.”
But John Bolton, founder of Squirrel mortgage company, has slightly different advice. “Don’t die in the ditch paying the mortgage off,” he says.
While Bolton advocates paying the mortgage down, he says deciding at what pace depends on what kind of person you are.
If you are frugal and get satisfaction from how quickly you can pay down debt then go for it.
But if you are someone who doesn’t care so much and wants to enjoy life, then that’s fine too.
“I kind of think, when you die you can’t take money with you. I kind of think, you can spend your whole life going through life and get to the end of it and look back and go ‘well, that was bloody terrible, I should have made the most of what I had when I had it.’
“Pay your mortgage. Gradually chip away at it. Very slow levels of property inflation will help. You’ve got to live somewhere anyway - but don’t die in the ditch paying the mortgage off.”
You’ll have the chance to attack the mortgage more aggressively later on, he says, when the children have grown up and you have more discretionary income.
Bolton says joining Kiwisaver and contributing more than the minimum is the way to go: “I think Kiwisaver’s the biggest no brainer in the planet.
“Everyone needs to be in it. Everyone should be contributing more than the minimum - that’s the thing that’s really going to look after them when they get to retirement.”
Just look at the maths, he says.
The average Kiwisaver return for a growth fund is 8 or 9 per cent, but the average interest rate on the mortgage is 3.5 per cent.
“So if you had a spare dollar are you better to put an investment in the 9 per cent or are you better to pay down the mortgage?”
One of the most important things you can do is understand your motivations - don’t sleepwalk through life on a default Kiwisaver scheme with a really big mortgage and spend all your money at the café, he says.
“But if you don’t pay your mortgage off because you want to put your kids through private school or you’re not paying your mortgage off because there are these other things that are more important to you, that’s fine, because you’re thinking it through.”
