People often overlook the simple changes they could make in their current lifestyle which could result in significant differences over the course of their life. This is true financially, but also true across all facets of life.
I thought I'd write a blog to highlight some of these things that are often overlooked when it comes to your mortgage, to shed some light on these.
For the purpose of the examples I've used, I've worked off the average house-price in NZ being $889k as at July 2023 (QV House Price Index).
The Life of Your Mortgage
When you pay down a mortgage on a Principal and Interest basis over 30 years, most people are aware that in the beginning, with each payment you make you are paying more of the "Interest" and less "Principal" and as time goes on this adjusts to becoming more "Principal" and less "Interest'. However, people wrongly assume that this happens about 15 years into your mortgage (i.e. half way). This is simply not true.
Let's assume you got an 80% loan on your property purchase of $889k, which would be a loan amount of $711,200. Assuming a 1-year fixed interest rate currently of 6.99%, you'd be looking at repayments of ~$4,727 per month. Your first payment would be $4,143 in Interest and ~$584 of Principal, meaning your loan balance would've only reduced by $584, down from $711,200 to $710,616.
It would only be by the 21st year, that your Principal payment would be higher than your Interest repayment. At the end of that mortgage (again, assuming the same interest rate) over 30 years you would've paid down your initial loan of $711,200 in full, and additionally paid an extra $990,468 in interest - totaling over $1.7m in total mortgage payments over that 30 years.
In reality however, very few people end up paying off their mortgage over 30 years, instead, we move houses throughout our lives. We upsize, downsize, move suburbs, countries, etc. and so in many cases wouldn't pay the full extent of that interest burden - but it would make sense that where possible, if you're able to reduce the amount of debt you've got on your family home - you should do so to save interest.
Additional Mortgage Payments
In the current economic environment, meeting your current obligations can be tough. However, for those in a position to be able to make extra repayments, minor additional payments can make significant inroads when it comes to paying your mortgage down quicker and saving you thousands of dollars in interest. There are many ways you can do this:
A simple example of renting out a bedroom for an extra $200 per week and taking this income and adding it to your mortgage could save you 10 years and 7 months off your mortgage (i.e. it would be repaid in under 20 years instead of 30) and save you $402,015 in interest costs.
Considering that renting out one bedroom could do that often is a huge wake-up call for mortgage-holders, and is certainly becoming more common in the current housing market.
If you rented out two rooms ($200 p/w each) and added all of this to your mortgage (again, assuming the same figures as before - $711,200 at 6.99%) you'd save 15 years and 3 months (i.e. you'd pay off your mortgage in less than half of the original 30-year loan term) and you'd save $561,371 in interest.
Not to mention, doing this (an extra $400 p/w in mortgage payments ) would mean you'd be paying more Principal than Interest by Year 5!
This is definitely worth considering, and when adding this to the other bullet points above - you could be debt-free a lot faster.
A Free Lunch
While it's often said that 'there's no such thing as a free lunch' this may be about as close as you could get when it comes to finance. Utilizing revolving credit facilities to reduce your debt more quickly can often speed up the process and help with the benefit of compounding interest payments that work in your favour. We've written a blog about the use of revolving credits in this way here.
The most efficient way to utilize this strategy - provided you're diligent with your finances (i.e. you won't be tempted to spend more than you should) is to get a credit card and spend money from that throughout the month for your day-to-day life (which will hopefully accumulate points for you on the card and get other benefits) and then at the end of each month, before incurring interest on the card, pay it off with the funds sitting in your revolving credit. This is a way to use interest-free money on the credit card, while saving/offsetting your debt on your mortgage with the income you get direct credited on a regular basis. Look out for credit cards and their costs & benefits, and while you may not be incurring interest by doing this strategy correctly, you'll want to be sure to double-check if the credit card has any annual or monthly fees that could outweigh your mortgage savings here.
As always - our posts are not specific financial advice but are simply generic in nature and give some insights on tips to consider. If you'd like a discussion around your personal situation, as always feel free to Get In Touch.
Ryan Smuts
11 September 2023