Here's why you're not paying off your mortgage

Tuesday, 6 November 2018

Upping mortgage payments by $10, $20, or $30 a week makes a huge difference to the time it takes to repay the loan, and the total interest paid.

ANALYSIS: If you've had a mortgage for the past couple of years, each monthly statement might be a little depressing.

You pay thousands to the bank – but the amount you owe might only reduce by hundreds of dollars.

This is because most New Zealand home loans are 'table mortgages' in which payments are smoothed out over the life of your loan so they only change if your interest rate does.

At the beginning the bulk of what you pay is interest but as you progress through your loan, more of each mortgage payment goes to principal.

* New Zealand's huge home loans are crazy

* Young home buyers, and how they live with massive mortgages**

The problem with this is as follows; if you then move house after a few years, and borrow more, you reset your mortgage and push out the time when you will start paying off the initial borrowing.

In the first full year of a 25-year $500,000 table loan at 5 per cent, about $10,000 of the $35,000 in payments you make will go on to the initial amount borrowed. The next year, it's just under $11,000.

And it takes more than 10 years for the amount to be evenly split, and the initial capital owed to start dwindling.

But if you're not happy about waiting to drive down your mortgage balance, here are some other ways to get rid of it. And guess what? You can also save money. Win!

Revolving credit:

This takes some willpower but it delivers results. Portion off a part of your mortgage and set it as a revolving credit facility (debt you can drawn down from when you want to). This could be $50,000 or $100,000. Then, when you are paid your wages, have your income go into that revolving credit account to offset the amount owing.

Put your living expenses on your credit card, and pay off the amount owing on the card each time it falls due. Try to build up the amount left in your revolving credit account as you go, then when it's paid off, close it and open another.

Reducing loan:

A reducing loan does what it says on the label – you pay the same amount of the initial borrowing back each month, but the interest portion reduces as the amount owing does.

This means you build up equity more quickly, but it can be a prohibitively expensive structure for people taking out a big new mortgage. These are best for people who have good incomes at present but expect that to dwindle over time – which is not the case for most first-home buyers.

Higher payments:

One of the most effective ways to improve your position is to make extra payments. If you've borrowed $500,000 at 5 per cent interest, you will pay $2923 a month and will pay $376,870 over 25 years.

If you can increase that by $1000 you'll be out of debt nine years early, and save $160,000.

Even if you can only afford to increase your payments a bit, you'll save a lot. If you can add another $500 a month, you'll get out of debt six years earlier and save $104,600.

An extra $200 a month would mean two years off your mortgage and $50,000 saved.

Well done you!