A home loan is a big financial commitment, possibly the biggest debt we will ever have and paying it off over the next 30-years is something that none of us really want – we want to pay off the mortgage much faster.
But how do we pay off the mortgage faster?
There must be a ‘system’ that people are just not telling me about…
we don’t want to still be dragging a large debt around for the next 30-years.
Working as a mortgage broker for almost 20-years I have seen a lot of “so called” debt reduction systems that are sold for thousands of dollars, yet in our office we offer this advice as part of what we do every day with everyday Kiwi mums and dads who just want to pay off their home loans more quickly.
So I thought we would explain a little about what these debt reduction systems are and why they can work for some people, but unfortunately usually don’t workfor most people.
None of us like to see our bank statements and the large chuck of our hard earned money going straight to the bank to pay our mortgage. Then we get the mortgage statement only to see that even with these huge mortgage repayments, our mortgage has hardly reduced at all.
Of course we still want to live in a nice house that we can call our own, but we get tired of working to pay the mortgage.
Yes, when we first took out our mortgage we were happy enough to have a 30-year mortgage and we knew that we could afford the repayments, but 30-years is a long time and we really want to pay off our mortgage sooner so we can have the extra money to enjoy life with.
But how can we pay off our mortgage faster?
Well no matter what anyone tells you, the only way to pay off any loan more quickly is to pay more of the mortgage principal off which means you need to either increase your payments or reduce the loan costs – or both!
Don’t be fooled by what you may be told by these “so called” experts that say they have a debt reduction system that will help you pay the mortgage off more quickly. All they are doing is creating a report to show you how you may be able to spend less and therefore effectively are paying more on your mortgage.
When you get approached by a “so called” debt reduction specialist you might be led to believe that there is some secret way to pay your mortgage off sooner.
Those “specialists” may promise that you can cut years off the term of your mortgage without paying any more, and for this advice they will charge a “modest fee” of $3,000 or more to prepare a report for you which will show you the “secret” system. They will show you that you can cut years off your mortgage and save an enormous amount of money and this justify’s their fee. I know that it seems logical to pay $3,000 if you could save ‘say’ $150,000 just by learning the secrets that the banks won’t tell you
Whichever way you look at it, to pay any debt off faster requires bigger repayments or reduced costs.
Sure, sometimes these “so called” specialist use revolving credit accounts to disguise what you are doing, but the fact is you will need to pay bigger repayments – but not much bigger.
We recently went through this with family friends who were 1-year into a 30-year mortgage of approx $560,000 which was costing $1,545 a fortnight. They therefore had another 29-years on their home loan to go before they could really say they own their home and they were already questioning what they could do to pay the loans off faster … they had heard a friend mention a debt reduction plan that they were on and were looking for a secret method that could work for them.
This is how their mortgage looked;
When we discussed their finances we found that they also had two other debts; a loan of $14,688 with Avanti Finance which is costing them $593 per month at an interest rate of 19.95% and a personal loan with GE Money at 29.95% which they are paying $100 per week on.
Some of these types of loans are expensive.
They are sold on the basis that the weekly repayments are affordable, but compared to a small top-up on a mortgage they are very expensive. Even personal loans with the banks are expensive and unfortunately due to laziness and the staff bonus structures the banks will often provide a personal loan at 17.95% instead of a mortgage top-up at less than 6.00% which is about a third the cost.
So we suggested that we should consolidate the short-term debt into the mortgage to reduce the interest costs. We could have consolidated these loans and had them paid off over the same 29-year term and the fortnightly cost reduces from the $475 they are paying now to $65 per fortnight; however we wanted to show them what the effect on their mortgage would be if they kept paying the same loan repayments of $475 on their mortgage.
As illustrated here, by consolidating the short term debt and keeping the repayments the same they are able to pay the mortgage off in 18-years instead of the 29-years they have remaining.
The interest that they will save by doing this is a staggering $269,917!
So by paying the same as what they are paying now on their home loan and short-term debts they are able to shorten their home loan by 18-years.
This is the first stage of any debt reduction system and it has cost no more than what they were already spending.
But like most people they could be a little more careful with their spending, so we suggested that we look at contributing another $100 per week and see what difference that would make.
We then decided to look at what would happen if they could find an extra $100 per week to pay towards their mortgage.
By increasing the mortgage payments by $100 per week we were able to shave another 3-years off the mortgage and save another $59,719 in interest costs (total savings of $329,636).
Of course they were keen to consolidate their debt plus decided they needed to look at their budget and see where they could save some money to put towards reducing their mortgage.
Most of us are wasting some money!
It may be that we are buying coffees, buying our lunches or spending money on some unnecessary things. We all do it and make excuses for ourselves, but if we are really serious about paying our home loans off faster we need to consider where we can find a little extra money – and most of us can without affecting our lifestyles.
We recently wrote a blog on the real cost of coffee which was really about how the money spent on your coffee could help pay your mortgage off sooner. This was a popular blog written on our
But any budget will take a little discipline.
Anyone can set a budget, but often we need a little help to ensure we stick to a budget.
If you are serious about paying your debts and mortgage off faster then you need to consider setting up your mortgage to achieve this and setting a budget so you can control your spending.
As mortgage brokers we have found that using software to manage your budget is going to be more effective, but the software needs to be easy to use and have bank feeds so that you are not having to spend hours entering every expenses.
For this reason we suggest that you spend a few dollars on PocketSmith which enables you to set budgets on your actual spending habits and with automatic bank updates you can see in a snapshot what is really happening with your money.
PocketSmith have a free version, but we tend to prefer the paid version with bank feeds as it is then always up to date.
You may be a little surprised at what you actually are spending your money on, and within the software you can set mini budgets to monitor specific areas of spending. Sticking to a household budget is all about making small changes in the way you spend rather than trying to make a huge change overnight.
Spending is a habit and you need to adjust that habit.
The best incentive to help adjust a habit is to be able to see the results and this is where we like the budgeting tools like PocketSmith.
As we illustrated, if you have any loans or credit card debt then it makes sense in most cases to add this to your mortgage so you can take advantage of the lower mortgage interest rates.
The Sorted website has some calculators that can show you how to get rid of expensive debt, or you can speak to a mortgage broker and request a mortgage review which will highlight the savings that you might be able to make, and therefore work out how much sooner you could pay your mortgage off. A mortgage broker should also be able to review your mortgage interest rates as lower rates can make an impact too. At Mortgage Link we also like to work with you to make sure that you stick to your plan and therefore actually see the results.
Many people have bigger short-term debts and credit card debt and in these cases the savings can be a lot more significant.
Some mortgage brokers or debt reduction specialists will encourage you to refinance your mortgage and shift to another bank.
While this may be the best thing to do it is not always and you need to make the right decision for the long-term benefit, not just because there is a bank offering a free iPhone of a slightly better interest rate. You should only change banks if you are unhappy with your bank or can get a better or more appropriate mortgage with another bank or non-bank lender. The key is to get the mortgage structured in a way that allows you to pay it off faster and of course you want consistently competitive mortgage interest rates too.
Most banks will allow you to set your mortgage up in a manner that allows you to pay your mortgage off sooner.
Good mortgage advisers should always be looking for ways to help people save money on their home loans. Some have the experience and tools that they can use to show you how easy it is to pay your mortgage off faster using proven methods that really do work.
You should also look to consolidate any other more expensive debt and use those savings to pay your mortgage off even faster.
We all like to spend money but you should also look at what you are spending money on now and see if you can identify ways to save a little which can then be added to your mortgage repayments.
Remember as a mortgage broker at The Mortgage Supply Company I offer advice on debt consolidation and mortgage reduction strategies for free.
We hope that you did find this information useful.
If you found this useful we suggest that you request a free mortgage review for yourself and also ask if you could you “share” this article or “like” this article so your Facebook friends get to see it too.
This is one more simple way to really help people…