As the cost of living continues to bite into household budgets, paying off your mortgage faster is a difficult ask, but experts say it is doable particularly as interest rates start to come down.
ANZ head of homeowners Emily Mendez Ribeiro said ANZ had seen a notable increase in homeowners getting ahead on their mortgage repayments with 29% of their mortgage accounts positioned six months ahead of where they needed to be.
There were still pockets of stress, but they were much lower than anything seen during the Global Financial Crisis, she said.
As mortgage rates start to trend down, homeowners can keep their repayments at the same level and start eating into their mortgage more significantly.
Start your property search
For example, on a 30-year home loan with a $500,000 mortgage at a 6% rate, paying an extra $30 a week could reduce your loan term by three years and save over $70,000 in interest, Ribeiro said.
Increasing repayments by $60 a week will reduce the loan term by 5.5 years and save the customer about $125,000 in interest costs over the lifespan of the loan.
Discover more:
- Tony Alexander: Where Kiwis plan to splash the cash now rates are falling
- Granny's old villa sells for $12.6m after stunning makeover
- Mum and dad build epic 36m, glow-in-the-dark waterslide in their backyard
“Chipping in an extra $20, $30, $40 a week ... means you can pay off your mortgage faster and gives you so much savings in interest costs,” Ribeiro said.
She said lump-sum payments (ANZ allows up to 5% to be repaid without penalty each year), especially for those with irregular income such as contractors, could also help pay off mortgages more quickly.
Enable.me founder Hannah McQueen said while paying off a mortgage faster can seem like a daunting or even unrealistic goal, it was achievable with the right approach and mindset.
Enable.me helps clients become mortgage-free within 8 to 10 years, but McQueen said it was not about creating a strict or overly demanding financial regimen that’s impossible to stick to. Instead, it’s about identifying and addressing inefficiencies in how people manage their finances and structuring their mortgage for success.
She said about 20% of a client’s income was inefficiently used, split equally between structural and behavioural inefficiencies.
Structural inefficiencies include improper mortgage set-ups, overpaying for insurance, mismanaging KiwiSaver or paying too much tax as a self-employed individual.
Enable.me founder Hannah McQueen: “Paying off the mortgage can be a practical milestone, but the real target might be getting to a retirement they can afford or simply reducing financial anxiety.” Photo / Viva
“These things, which in and of themselves, don’t even feel that consequential, add up to about 10% of your income,” she said.
The other 10% was poor money habits like using the credit card for all purchases which she advised against, even if you pay it off each month.
She said homeowners should be balancing trying to pay off debt with a practical understanding of their overall financial health.
“You need to understand what the financial goal is. Is paying off your mortgage a path to financial freedom or is it part of a broader plan to afford retirement,” McQueen asked.
“Paying off the mortgage can be a practical milestone, but the real target might be getting to a retirement they can afford or simply reducing financial anxiety.”
She said homeowners also needed to be aware of getting caught in a situation where all their funds were tied up in their home, leaving no liquidity for emergencies or unexpected expenses.
In some cases, she said, homeowners may be better off putting extra money into an offset account or an emergency fund to ensure they have access to cash when needed.
“The key is to have options. While it’s great to reduce mortgage debt, you don’t want to do it at the expense of your financial flexibility.”
Squirrel Mortgages founder and head of mortgages David Cunningham said there were still significant advantages to paying off your mortgage faster, but it had to be balanced with being able to live life.
“Even small additional payments can make a big difference over the life of the loan,” he said.
While the economic outlook was improving, he believed many homeowners were still in survival mode and with mortgage rates doubling in the past two years, some of his clients had seen their interest repayments increase by $10,000 to $20,000 annually.
“Two years ago, when interest rates were under 3%, many people were comfortably paying extra into their mortgage. Now, with the average floating rate significantly higher, that extra capacity just isn’t there for a lot of households,” he said.
Homeowners have felt the squeeze of high interest rates and a significant spike in the cost of living. Photo / Dean Purcell
“For many Kiwis, it’s still about survival right now. Paying off the mortgage faster may not be realistic, and that’s okay – it’s more important to ensure they can manage their finances without undue stress.”
Those who maintained their mortgage payments during periods of lower interest rates however have been able to build a buffer and pay down their loans faster. He said if people were able to pay more to build a buffer it would benefit them in the long term, particularly first-home buyers.
“If they’re planning to start a family, building a buffer early is essential to cover those future expenses or career changes.”
He encouraged homeowners on fixed rates that were about to roll over to consider restructuring their loans to allow more flexibility with additional payments.
“You could switch to a split mortgage, where a portion is fixed, and the rest is on a floating rate, giving you the flexibility to pay off more when you have extra cash. You do need to be disciplined if you’re going with that option however as it can be easy to dip into.”
He said a check-in with your bank or a mortgage broker to review your loan structures ahead of any mortgage rollovers was always worthwhile.
- Click here to find properties for sale
