How to pay off your home loan faster

Smashing the mortgage like a pro doesn’t require a superhuman effort. A few dollars a day can save tens or hundreds of thousands of dollars.

A $500,000 or $800,000 mortgage over 30 years can seem insurmountable. A few simple strategies can help slash that mortgage, says Rupert Gough, a broker at Mortgage Lab.

Gough points out that every single extra dollar paid into the mortgage roughly saves as much again in interest by reducing the length of time needed to pay the mortgage off.

“The first thing is to really appreciate what a little bit of extra money on your mortgage does to the end result,” says Gough.

“You can say to people ‘pay off your mortgage’. But if they don’t really appreciate the benefit of it, you’re fighting a losing battle. Typically for every dollar that you put on your mortgage, you roughly save that amount again on interest. That makes it easy when you think: ‘should I spend $30’ on something when it’s actually costing me $60?’.”

When it comes to mortgages, it’s one time in life that being a bit obsessive compulsive can really pay off, says Gough.

“There’s no trick to it. The ones who really stick to it and have that type of personality succeed. You can almost see who they are from when you first meet them.”

Strategies to smash the mortgage:

1. Pay it down $1 at a time. A good strategy can be to avoid the daily fritter and make regular transfers into the mortgage account at the end of each day or week. How it works is that the homeowner chooses not to buy a daily coffee, or takeaways, or that unnecessary spending and pushes that small sum over to the mortgage account. Another way to do this is to round down the bank balance to the nearest $10 at the end of each day and transfer that sum to the mortgage account. Some banks allow people to save the change from every online transaction which is transferred to a specific account. Or every time the budget is under spent in a category, transfer those savings to the mortgage.

Mortgage Lab broker Rupert Gough: "Typically for every dollar that you put on your mortgage, you roughly save that amount again on interest." Photo / Fiona Goodall

2. Take a fine tooth comb to spending. The vast majority of New Zealanders could find spare money if they tracked income and spending effectively. Despite rising supermarket prices, much of what is in trolleys is not essential spending, and one third of groceries end up wasted. Learning how to cook from scratch in preference to ready-made meals or My Food Bag style services, can divert a considerable amount of money to the mortgage.

“There is a dose of reality that you can live on rice and soy sauce,” says Gough. “You have to enjoy yourself at some point. But the thought [of doubling money] might help in terms of making last-minute decisions about spending. If you could double that money by putting it on the mortgage, would you still buy that thing?”

3. Beware of expenses. Drill down into bank statements to look for expenditure to cut out completely. “One thing that we have noticed as a trend over the past three or four years, is this micro subscription business model,” says Gough. That includes the likes of Netflix, Prime, Spotify, Audible, and Dropbox. Even dentists are trying to sign up customers to regular subscriptions. “You can end up with 30 or 40 micro subscriptions. You might think ‘what’s the point of cancelling, that it’s only $8 a month’, but that adds up. Subscriptions really are a death by 1000 cuts in the budget.” Managing expenses comes down to the groundwork of budgeting. “If you’ve got a good budget in place, you’ve got your finger on the pulse of what’s going out of your account,” says Gough.

4. Dedicate pay rises to the mortgage. “Any time you get a pay rise, allocating a good portion of that to the mortgage is an obvious [step to take],” says Gough. Pay rises often lead to lifestyle inflation, where ‘needs’ expand to fit the new income. Yet directing the majority of a pay rise to the mortgage will make a major dent in reducing the debt.

5. Bonuses and ‘found money’ can reduce the mortgage fast. Don’t fall for spending bonuses on treats. A bonus or commission is part of overall income. Add it into the budget and allocate fixed ‘me’ money or ‘treat’ money to keep overspending in check. Treat so-called ‘found money’ such as FlyBuys, other rewards, windfalls, and air miles as earned income. Rewards can usually be spent at the supermarket or petrol station, instead of on unnecessary items from catalogues. That turns points and rewards into extra cash, freeing up other money to pay down the mortgage. Don’t take extra flights because of air miles. Use them for planned travel.

6. Game the mortgage. For some people, gamifying the mortgage can work. There are many ways to do this. One might be setting up a system of treats every time an additional $1000, $10,000 or $100,000 is paid off over and above minimum payments. The treats don’t necessarily need to be large. Just something to look forward to. “There is a particular type of personality that loves that,” says Gough. And some people react well to a specific goal. “I’m going to pay off an additional $200 this week. Or if I pay off $5000 this quarter, I’ll take myself out to dinner”.

“One mind game that we try to get clients to do is to calculate what their mortgage payments would be at 8%.” Clients work towards making payments at that level. “It protects them from future interest raises and pays down their mortgage more quickly in the meantime.”

7. Reduce the mortgage term. Sometimes customers choose to reduce their mortgage term, which locks in increased repayments. This has exactly the same outcome as overpaying the same amount of money over time, but is a different way of skinning the cat. “If you have a 30-year mortgage, based on an $810,000 mortgage at 5% that is $1000 a week. Increasing that by $100 per week to $1100 brings the term down to 25 years and saves you $150,000 in interest,” says Gough.

By formally upping the payment it forces homeowners to make those payments, he says. “For people like me who spend their money on too many coffees, forcing myself to make those extra payments works really well. It’s like KiwiSaver. The money is gone, and you don’t have to deal with it. If I relied on myself to push the money across it would just go to restaurants and cafes.”

8. Strategic structuring. Paying the mortgage down faster does require that it’s structured in a way that enables additional repayments. Sometimes banks penalise homeowners who overpay the mortgage, especially on fixed rate mortgages. That’s because they calculate their profits on the mortgage term staying the same, not being paid down more rapidly than agreed. Most mortgages allow people to increase a little bit without any penalty, says Gough.

How overpaying the mortgage works is different at every bank, says Gough. “At Westpac, for example, [the mortgage is] another suffix. You can put [extra money] in, but you have to apply to get it back. Whereas other banks allow you to withdraw the extra payments.”

To counter this, homeowners can choose mortgages that allow overpayment, or keep a portion of the mortgage on a floating rate. Failing that small sums of money could be hived off into a separate savings account until the next interest rate refix, when the money can be used to reduce the mortgage.

For some people the easiest way to structure their mortgage for overpayments is to have a revolving credit mortgage. “That means you can put money on it any time,” says Gough.

“The downside of revolving credit, you can take money off at any time,” he says. One way around this is to have your bills and spending accounts with another bank, having budgeted sums paid from the revolving credit mortgage into those accounts, to avoid accidental overspending. “That way you don’t see the available [balance] on the revolving credit account when you log in. It can be easy to be tempted to buy a new TV or something when you’ve saved up two grand on a mortgage. Out of sight, out of mind.”