Should you be making extra mortgage payments?

If that’s not something you’ve given a lot of thought to in the past, it might sound like an odd question. Many people like to keep their mortgage payments as small as possible!

But if you can afford to increase your payments, it could pay off in a big way.

Here is what you need to know.

Why pay more?

In a similar way that making extra contributions to KiwiSaver can be really effective over time to increase your balance because of the effect of compounding returns, making extra payments on long-term debt like your mortgage can be effective in reducing your debt.

Take, for example, a $500,000 mortgage with a 6 percent interest rate, and a 30-year term.

Your minimum repayment would  be approximately $692 a week, according to Sorted’s website.

But any amount extra you pay above that will reduce the principal that you owe, and,will also cut down the future interest you will be charged.

If you are paying only the minimum repayments, you’d be on track to pay $578,452 in interest over the term of your loan. (Although interest rates will change over time, so that number won’t be exact.)

If you could increase your weekly payment to $710 a week, you would only pay $530,870 in interest,pay off your home loan two years earlier and build equity more quickly (again, subject to interest rate fluctuations).

A bigger increase in repayments would cut down the loan balance, and interest bill, even faster.

You could also make extra payments as a lump sum, and receive similar benefits. Moneyhub calculates that a $10,000 lump sum paid on to that $500,000 loan with 30 years left to run could save $47,257 in interest if the minimum repayments were to be made over the remainder of the scheduled loan term.

Is it right for you?

Whether it makes sense to pay off your loan more quickly – and how much extra you would like to pay – will depend a lot on your circumstances.

You may have other goals or needs that need to be a priority for now, and maybe your home loan will be further down the list for a while.

If you are channeling all your extra money on to your home loan, it may also be appropriate to consider setting up an emergency fund alongside, so that if you were to strike an unexpected expense, you have the ability to cover it without getting off track.

As your financial adviser, we can help you to work out the most appropriate way to pay down your debt more quickly, if that is what you want to do.

There are ways that you can do it that allow you to retain flexibility for the future, such as not reducing the term of your loan, or operating a revolving credit facility. We can explain the pros and cons of various strategies.

Check for charges

Generally, if you have a floating home loan, you can make as many extra payments as you like without incurring additional costs. But if you are on a fixed term, there may be some penalty feesassociated with this.

Depending on your lender, there might be a set amount extra that you can pay per year without incurring a penalty. We can help you to work through this.

We’re here to help

Getting debt-free is a priority for lots of New Zealanders, and if paying down your home loan more quickly is on your list of things to do, we’d love to help. Our team of experts is here to assist and we can talk to you about your options and what might be the best way to achieve your goals.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.