Once you’ve bought a property, whether as a first home buyer or an investor, you’ll be required to make mortgage repayments to cover the cost of the home loan. These mortgage repayments can be interest-only (generally used by investors) or principal and interest, which establishes a set amount to pay off within a specific period.
Mortgage repayments can also have either a variable interest rate or one that’s fixed at a certain rate for a specific period of time. How the mortgage is structured affects the options you have when it comes to repaying it. This makes it crucial to research the huge variety of home loans available before choosing the best option for your circumstances.
The key to meeting your mortgage repayments is to be smart and organised. Below we’ll look at the best tips to ensure you pay your loan off as efficiently as possible..
Make Larger Repayments
By making larger repayments than are required each fortnight or month, you will reduce the principal and interest component of the loan (unless you have an interest-only loan). You can do this on a regular basis or just whenever you can afford to. Either way, it will reduce the overall cost and time it takes to pay off your property.
For example, if you had a $500,000 loan over 30 years at an interest rate of five per cent, the standard monthly repayment would be $2,684. If you pay an extra $500 to this amount every month it would shorten the loan term by nine years and save you $152,000 in interest.
Check if your loan allows you to make extra payments and if there are any fees for doing so. You may not be able to make extra payments on home loans with fixed rates. There may also be a limit or other penalties involved.
Pay Off the Principal Early
Unless you have an interest-only loan, you usually pay both principal and interest on a home loan. When you begin paying back a mortgage, the majority of the loan repayment is servicing the interest while the remainder pays off the principal. By making extra repayments, you can put more of your money towards paying off the loan rather than the interest.
Just like making larger repayments, paying lump sum repayments early in the life of the mortgage reduces the size of your loan faster. For example, one single payment of $15,000 on a $500,000 mortgage with a five per cent interest rate will save $45,000 and shorten the loan term by two years.
Split Interest Rates
Mortgages with variable interest rates mean the interest charged on your home can fluctuate depending on the OCR and/or the rate charged by your lender. This means your repayments can increase or decrease depending on whether interest rates rise or fall.
Many homeowners prefer the security of regular payments under a fixed rate loan, which they agree to pay regardless of what happens to interest rates. But there is the third option of splitting your loan, meaning you fix a portion of it while the remainder is left variable. This allows you to take advantage of both options without the same level of risk.
Find a Cheaper Interest Rate
There are a huge number of home loan and mortgage providers across New Zealand. Shop around to find a home loan that offers a lower interest rate and suitable structure for your situation. If you are thinking about switching home loans, be cautious as it may cost you extra.
Ask your current lender to match the best deal you can find or offer you a better loan so you can avoid the costs of refinancing. Remember that your business is important to a lender, giving you the ability to negotiate.
The best approach to efficiently paying off your mortgage is to get professional advice on your specific circumstances. This will enable you to confidently pursue the best strategy with minimal risk.
Get in touch with us if you’d like to speak with an independent mortgage broker who can offer unbiased recommendations on what best suits your budget and situation. We are based in Papamoa and can visit clients in Tauranga, Waikato, Mt. Maunganui and the wider Bay of Plenty.
Are you looking for a home loan or better mortgage rates? Call Craig on 027 667 2537 or contact WealthHealth online.