How to be mortgage-free by 40

Aucklander Michael Wan has his sights set on paying off his 30-year mortgage in less than half the time.

Wan and his friend bought a three-bedroom two-storey house in Auckland’s Panmure in 2019 when he was 29. The flatmates saw that house prices were starting to rise in the city after a two-year slump and didn’t want to be left behind.

But they also didn’t want to be saddled with a big mortgage for the rest of their working lives.

Their top strategy for slashing the home loan was to rent out one of the bedroom to a flatmate for $350 a week. The rent goes straight into the mortgage covering just over half of the fortnightly payments for the mortgage.

The design of their house, which has two double ensuites upstairs and a single room with third bathroom downstairs, works perfectly for their situation.

“It has been pretty good [having a flatmate]. We have different spaces. It’s not too crowded,” Wan says.

At the current rate of loan repayment, Wan, who works as a business analyst, could be mortgage free before he turns 40.

“The mortgage repayment is $1300 a month, so it pretty much makes up half of the fortnightly mortgage repayment.”

At the time of buying, the pair had sought advice from Loan Market mortgage broker Helen Stuart, who showed them how they could pay off the mortgage faster and build up equity.

Stuart always recommends that first home buyers keep paying what they would have in rent, to help pay the mortgage off faster with the extra payments. It’s an especially good strategy while interest rates are low as they are currently, she says. Banks use a “test rate” to estimate whether buyers can afford the mortgage. This is around 6% to 7%, which mean buyers could afford to pay the equivalent.

Even an extra $50 a week spare cash can shave years off a mortgage and reduce the overall interest paid, says Stuart. “I always suggest this (to first home buyers). People often don’t know.”

Some buyers want to start renovating or to have a family. Stuart recommends they save as much as they can into the mortgage or in savings accounts / term deposits in the meantime. For those renovating it means they need to borrow less.

“Maybe they’re planning to have a family. A lot of people want to renovate straight away. I say ‘do the saving’ til you can do the renovation so you don’t have to borrow. Even the $50 or $20 a week extra. You can see that shaving five years or 10 years off the mortgage."

Wan and his friend have a second strategy of making extra payments into their flexi mortgage account set up for them by Stuart whenever they have spare cash.

Buyers do need to check with their broker, or bank mobile mortgage manager that the loan is structured in a way that extra repayments aren’t penalised.

There’s no reason why buyers can’t use multiple strategies to pay their home loan faster.

Other strategies of how to pay down your mortgage include:

Buy more modestly. First home buyers are often buying at the very bottom of the market. That’s not always the case, however, and compromise on location, size, condition, and other factors can work.

Buy more bedrooms. One more bedroom can pay dividends towards the mortgage in New Zealand. If owners can swallow their pride and live in the smaller bedroom and rent out the others, they can earn even more money. It’s not forever and it’s a way to fast forward financial comfort. Some houses have spaces not technically bedrooms that can be rented out. That often includes dining rooms. Some first home buyers forgo having a lounge at all for a period of time to rent that out. The kitchen/dining becomes the communal space.

Go Airbnb. Not everyone wants a full-time flatmate when they’ve reached the stage in life that they’ve bought a house. A way around this is to rent a room or two on Airbnb to short term guests. It takes a very clean and tidy house to do this and a sociable mindset, that not everyone has. The money can be good. In Wellington, for example, rooms in private homes often rent for more than $100 a night on Airbnb. If hosts get used to the Airbnb system it’s possible to have a second listing to rent the entire house on Airbnb when the owner is on holiday. It’s a great way to earn extra income. This is not an uncommon strategy for Airbnb hosts.

Reduce the loan term. First home buyers typically take out a 30 year home loan. By reducing that to 25 or even fewer years it is paid off faster thanks to fewer mortgage payments. It’s another take on making extra payments but formalises the higher repayments making it harder to take a month off. For some mortgage holders the discipline works.