Kill your mortgage faster

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Last updated 05:00 13/07/2014

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People with a combined mortgage debt of just under $5 billion have chucked the traditional slow-grind to paying off their mortgages.

While still only a tiny 1.5 per cent of the overall home loan market, NZ Home Loans specialises in helping people fast-track repayment of their mortgages.

Chief executive Mark Collins says the Kiwibank subsidiary company will break the $5b of loans mark later this year. He claims the groundswell of people contracting NZ Home Loans, which earns its income from commissions on loans and insurance, indicates a growing frustration with the rate at which people are paying their mortgages down.

Collins says people typically default to the standard terms the bank gives them, including the length of time over which repayments are calculated.

"If it is a 25-year term, then that is how long you expect to take to pay it off," he says. "That's the model we have grown up with. It's what our parents did. It's what we have been trained to do."

But with house prices so high and the banks' standard repayment term having risen to 30 years, there are increased incentives for active mortgage management.

If homebuyers just maintain the minimum payments to the bank, they'll end up paying for the house more than twice over which will obviously please the bank, Collins says.

A young couple buying a $400,000 home over 30 years with a starting deposit of $50,000, and assuming a long-term interest rate of 8 per cent, will end up paying interest of over $574,000, more than the price they paid for the home.

Collins says it is never too late to start actively managing your mortgage to slash the years it will take you to get debt free. He, along with Derek Bonnar from financial researcher Canstar, Massey University financial expert Dr Pushpa Wood, and Simon Hardie of The Shape of Money website, share their tips for killing the mortgage faster.

1 Don't be a lazy mortgage-holder

Set a target date to pay the mortgage off and then work out how to do it. It may be unrealistic to start out aiming to repay the mortgage by the time you're 45, but start at 50, and then regularly look to see if you can increase the speed at which you are repaying it. There are two ways to actively manage a mortgage. The first is to get professional help from the likes of NZ Home Loans. Or the DIY approach involves setting your own "stretch" targets, use the mortgage repayment calculators on Sorted.org.nz to help put numbers onto the plan, or get your bank to model different repayments options for you.

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2 Never accept minimum repayments

Minimum repayments result in more interest for the banks. Take the young couple mentioned above. If they opted to pay just $10 a week more than the minimum repayments, they'd cut their total repayments to the bank from $809,950 to $783,500.

3 Get the structure right

Collins says many borrowers would be better off having a chunk of their home loan on a floating rate revolving credit facility with a falling limit. The borrowers have their salaries paid direct into that account, and do most of their spending using a credit card. They then pay of the credit card balance at the end of the month. They end up paying no interest on the credit card, and the mortgage interest for the month is calculated on a lower balance owed. That's the NZ Home Loans way, but you can arrange that structure with your bank which Collins says can knock eight to 10 years off a mortgage.

4 Make additional voluntary repayments

Most mortgages allow you to make smaller additional repayments without having to pay break fees. For example, ANZ allows borrowers to make additional voluntary repayments of up to 5 per cent of the outstanding loan balance each year. Massey University's Dr Pushpa Wood budgets to save enough during the year to always make a 5 per cent extra repayment.

5 Use your haggling power

When Bonnar talked to one of the main banks recently, a loans staff member said Canstar should rate the banks on their average mortgage lending rates rather than the advertised interest rates which many people don't pay. Bonnar says that shows many people bargain the banks down when their loans need to be refixed, though you can negotiate on floating rate loans.

By reducing the long-term average interest rate from 8 per cent to 7.75 per cent, the young couple save $17,300 in interest over a 25-year term.

However, Collins says people should focus more on the rate at which they repay the mortgage rather than the bank rate they're being charged.

6 Aim to lift your repayments each time you refix

Plan to periodically lift your repayment rate, even a small amount can have a big impact. Some lenders will allow you to automatically programme do this. BNZ, for example, offers a "tailored" home loan, where each anniversary of the loan brings an automatic lift in repayments, which can result in home loans being paid off 10 years' earlier.

7 Allocate pay rises to the mortgage

Each time you get a pay-rise, allocate part of it to increasing repayments. You don't have to wait until your loan is due for refixing to do this.

8 Don't accept lower repayments when interest rates fall

The timing is wrong for this one with interest rates rising, but when the interest rate cycle turns and they're falling again, you don't have to just adjust to lower minimum repayments. Ask your bank to keep repayments the same or even raise them if you can as it will cut years off your mortgage, says Bonnar.

9 Don't keep upsizing

The pressure and temptation to spend is huge. But borrowing more to have the most stylish home in the street means living with debt for longer. It's not always a bad idea to borrow more to improve a home as long as it means it is then worth more.

But as Hardie says: "If a bank gives you an extra loan, it's good business for them, but not necessarily good for you. It's relatively easy to get a loan today, so think very carefully about adding to your mortgage, building that sun deck or extra room, for example. You can only really start saving for the future once your mortgage is clear. An additional loan, no matter how small, can add years to the life of your mortgage."

10 Focus on the equity

Collins says many people have no idea how much of their own home they own and are shocked when told they own the equivalent of only the living room - the mortgage-holder owns the rest. Collins says few people understand how little of the principal is paid off in the early years of a mortgage. It's one of the calculations NZ Home Loans does with new clients. "The language used is that it is ‘my home', but many people only own the living room, or even the bathroom." Once people grasp how little they own of their own home, they become focused on paying their debt off faster.

WHAT WE OWE, AND HOW WE OWE IT

Mortgages are by far the biggest chunk of household debt, and it's continuing to rise. At the end of April, households collectively owed $191 billion on housing loans, up from $181b at the end of April last year, according to the Reserve Bank.

Restrictions on low-deposit lending has forced many buyers from the market. In September 2013, a quarter of new mortgage lending was to people with deposits of 20 per cent of less. In April this year it was just 5.4 per cent.

The number of housing loan approvals is well down. Reserve Bank figures show In the 13 weeks to 14 June 2013, there were 7251 home loans approved comapred to 6113 in the same period this year.

There is a close split between floating rate loans and fixed, though with interest rates on the rise, the proportion of loans being fixed is rising. When fixing loans, consumers are opting for shorter periods.

- Sunday Star Times

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