Restructuring your mortgage repayments could save you thousands of dollars and by making just a few simple changes you’ll be one step closer to a debt-free life. Words: Sue Mckenzie
When I meet with people about their mortgage, I get them to consider a life without one. The idea of being debt-free is a wonderful motivation and makes people think of what they would do with the extra money – make property investments, home renovations, go into business, or take an overseas trip. The most-valuable lesson for most Kiwis is that it’s not the interest rate that matters, but rather the amount of interest you pay over the term of the mortgage that is most relevant.
Ultimately, the goal is to pay your mortgage off quickly, meaning you’ll repay less over time and the property can become the leverage tool with which a whole manner of lifestyle changes can become available.
An important fact to consider is that by making an increase in payments of around the price of a coffee a day for you and/or your partner, you could reduce your mortgage term by five to 10 years. That’s a huge saving when you consider the average total repayment is more than two and half times the original loan amount.
Once I understand the amount of equity (the difference of the home’s fair market value and the outstanding balance of the property’s mortgage) a person has in their property, as well as their income, we can look at the right way to tackle their debt. This usually includes an assessment of whether the current mortgage lender is the right one for the homeowner. The contract between you and your lender isn’t a rigid one and mortgages should reflect the best aspects of your financial situation at any given moment – if your current lender isn’t the best option for you, it’s time to move to one that is. A lot of the issues that work against mortgage repayments begin with short-term debt through hire purchase, personal loans and credit cards.
It’s important to review your finances and be able to answer that age-old question: “Where is my money going?” Consolidating that debt will give people more money in their pocket and I encourage them to use that on mortgage repayments.
Those with high incomes or joint incomes have the ability to put more towards debt while interest rates are still low. If you’re in this situation, look at breaking your mortgage up into manageable chunks to achieve a series of short-term goals. For example, aiming to pay five per cent of the loan in a year (both principal and interest) is very attainable.
The five-per-cent chunk sits aside from the total and can have current best interest (often floating) rates applied to it. I’ve seen people achieve incredible things when they aim to repay small bits like this at a time. They’re also thrilled to be making a dent in their debt. Of course, the more you pay off in the short-term, the better access to interest rates you have in the long-term, too. Consider your loan-to value ratios, which is the value of the loan measured against the value of
the property. The better the percentage in your favour, the less interest you have to pay. Self-employed people or business owners that have fluctuations in
cash flow have some different options. There’s no need to repay the same amount year round and absolutely no point of struggling to make repayments at some times of the year, while finding it easy at others. Your mortgage repayments can be structured to reflect the peaks and troughs of your income. Property investors have many options available to them. They will need to consider tax implications and a mortgage adviser will look at ways they can pay off their personal debt first before their investment debt.
Buying, selling and repaying the mortgage, which for many is their most-prized possession, can be stressful, but if you take a moment to consider all the things you have to gain from making smart mortgage choices, it will seem like the simplest thing. Some times are better to pay more than others. For that reason, I recommend homeowners have a mortgage review every year – circumstances for both them and the lenders change, and it’s about making the most of those situations to create a debt-free asset. I remember the first time I restructured my mortgage to work better for me; it was not only empowering, but saved me a considerable amount in the long-term. The sooner you do it, the better the returns.