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Pay Off Your Mortgage Early

Finance

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3.2.21 |

Joseph Darby

5 ways to repay your mortgage sooner, but should you?

Don’t want to being stuck in debt for the next 30 years?

If you're like most people, paying off your mortgage might be one of the bigger financial goals you'll ever have. Unfortunately, it's also one of the most daunting. With New Zealand house prices the way they are, this might seem like an insurmountable task to pay off that amount of debt.

But fear not, there are several ways to pay off your mortgage early, and you don't have to be stuck with debt for 30 years. In this article, we'll discuss the benefits of paying off your mortgage early, some strategies for doing so, and some pitfalls to avoid along the way.

Benefits of Early Repayment

Paying off your mortgage early can have numerous benefits. These might include:

You can save a lot of money on interest payments. By making extra payments towards your mortgage, you’ll reduce the amount of interest you pay over the life of the loan. This equates to more money in your pocket over the long term.
It can help you build equity in your home faster.
It can free up money for other financial goals, such as retirement savings, the capacity to take a year to explore the world, or something else.
Provide a legacy of financial security for future generations.
Peace of mind knowing that you are no longer burdened with debt – you own your own home outright!

Strategies for Paying off the Mortgage Early

1. Make Extra Payments

The most obvious way is to make extra payments towards your loan. Many lenders offer flexible options that allow you to make additional payments, or even lump sum payments, towards your loan. You can do this in several ways, such as:

Make a lump sum payment
Increase your regular payments
Make fortnightly payments instead of monthly payments

Naturally, your ability to do any of the options above will depend on the terms and conditions for your existing lending. In many cases, there may be a ‘break fee’ or penalty for making changes. Assuming there are no penalties involved, or the penalties are minor, every extra dollar you put towards your mortgage reduces the amount of interest you pay over the life of your loan and shortens the time it takes to pay off your mortgage.

To make more payments you might need to generate some extra cashflow. There’s two ways of doing that: increasing your income or reducing your expenses. Either way, here’s a few resources that might assist:

2. Refinance Your Mortgage

Refinancing your mortgage can be a smart move if you're looking to pay off your mortgage early. By refinancing to a lower interest rate, you can reduce your monthly payments and free up cash flow to put towards your mortgage.

Alternatively, you can refinance to a shorter loan term, such as a 15-year loan instead of a 30-year loan. Although your monthly payments will be higher, you'll pay off your mortgage faster and save money on interest payments.

Talk with our lending team to see if this might make sense for your situation: get in touch.

3. Restructure

While the mortgage interest rate is important, it’s not the only thing to consider. Mortgage restructuring is the process of rearranging a home loan into a winning combination of fixed and maybe floating interest rates, setting the right term or terms for fixed portions of the loan, and ensuring appropriate loan repayment amounts are set to suit you.

A restructuring of debt might also include the use of a…

4. Mortgage Offset or Revolving Credit Account

A mortgage offset account is a savings account linked to your mortgage that reduces the amount of interest you pay on your mortgage. Any money you deposit into your offset account is offset against your mortgage balance, reducing the amount of interest charged.

For example, if you have a mortgage balance of $500,000 and $50,000 in your offset account, you'll only pay interest on $450,000. This can save you thousands of dollars in interest payments over the life of your loan.

On the other hand, revolving credit is a line of credit that is secured against a property. It operates like a large overdraft, where borrowers can access funds up to a certain limit at any time. As they repay the funds, the credit limit becomes available again. Interest is charged on the outstanding balance of the revolving credit facility, and borrowers can make repayments at any time.

The main difference between the two is a mortgage offset account uses savings to reduce the interest charged on a home loan, while revolving credit allows borrowers to access funds up to a certain limit at any time. A mortgage offset account is a savings account, while revolving credit is a credit facility.

Mortgage offset accounts or revolving credit facilities often have different names depending on the bank (or non-bank lender) so if you’re going to take this option take your time to fully understand what you’re establishing!

Talk with our lending team to see if this might make sense for your situation: get in touch.

5. Downsize Your Home

Do you really need those empty spare bedrooms or all that lawn you barely enjoy?

If not, downsizing could be an excellent strategy. By selling your home and buying a smaller property, you can use the equity you've built up to pay off your mortgage and reduce your monthly expenses.

Downsizing your home will usually also mean reducing your monthly maintenance, utility, and other costs – including council rates and insurance – freeing up even more cash flow to put towards your mortgage.

Related material:

Pitfalls to Avoid

We all know debt can feel like an albatross around your neck, but it doesn’t have to be that way! Paying off your mortgage early is a great goal however, there are some other things to consider to along the way. Here are a few things to keep in mind:

Should you pay off other debts first? If you’ve got debt at higher interest rates – possibly a car repayment or a credit card balance you’re not repaying each month – then it will nearly always be wise to repay those before turning your attention to the mortgage.
Are there more pressing financial matters to tend to? Perhaps you’ve neglected to establish personal insurance or other general policies to protect yourself and your loved ones, maybe you don’t have an emergency fund to meet unexpected expenses, or something else?
We all need to strike a balance between the present and the future. It's essential to find a balance between paying off your mortgage early and enjoying your life – none of us know how long our lives will be, after all!
Diversification is the first rule of investing. If you pile every last cent you have into your home you might find yourself vulnerable to unexpected events such as a job loss, health trouble, or something else. This is even more so in New Zealand – where the whole country is prone to natural disasters! There’s an old saying about real estate: “you can’t eat equity” which means the equity you build in a fixed asset like a home might be great, but it won’t pay your monthly bills. To do that you need income, cash in the bank, or at the very least other liquid assets you can easily access such as shares or funds you partially sell or cash up.
It's also important to consider the potential opportunity cost of paying off your mortgage early. This means there could be opportunities being missed elsewhere. If you could be earning a higher long-term return on your investments than the interest rate on your mortgage, it may be more financially beneficial to invest at least some the money elsewhere instead of repaying your mortgage early. Thinking outside the box, could you do something else entirely different with those funds: start a side business, take a series of online courses or undertake other training to boost your earning power, or something else?

The Bottom Line: Paying Off Your Mortgage Early

Paying off your mortgage early can be an immensely rewarding experience, not only for the sense of accomplishment but also for the long-term financial benefits. Not only do you save thousands of dollars in interest payments, but once the mortgage is repaid you also free up your cash flow, allowing you to invest more in other areas.

However, it's important to avoid common pitfalls and find a balance between paying off your mortgage and achieving other financial goals. By doing so, you can enjoy the peace of mind that comes with owning your home outright and having the financial freedom to pursue other goals in life.