5 Ways To Repay Your Mortgage Faster

We have just been through a tough economic cycle. High inflation, high cost of living, and high interest rates have been challenging for all New Zealanders, especially those who have a mortgage.

A lot of the conversations I have been having with my clients recently surround reducing their mortgage repayments and utilizing different budgeting and savings tactics to help relieve a bit of pressure wherever they can. It is definitely tough out there.

I am happy that people are being conscious of their mortgages and are wanting to make a change or educate themselves in ways in which they can reduce their mortgage balance or wanting to learn how to repay their mortgage quicker in light of the higher interest rates.

As interest rates come down people will start having more disposable income as less money will be going towards their interest repayments. This is the perfect time to consider ways to reduce or repay your mortgage faster! You have been by forced into making higher than normal repayments as interest rates rose, so why not utilize these interest cost savings as interest rates come down to better your financial position and repay your mortgage faster?

I thought I would put together this blog which outlines 5 ways in which people can repay their mortgage faster.

1. Changing your repayment frequency

This seems like it won’t have a huge effect on your mortgage, and you would be right! However, by changing your repayment frequency from monthly to fortnightly or weekly you end up making a few extra repayments each year due to there being a higher frequency or repayments, which in turn means you will repay the principal of your loan slightly faster.

You also pay down your principal more frequently meaning there are less days outstanding with higher principal amounts and therefore accumulated interest costs.

Consider the following scenario:

You have a mortgage of $500,000, with a 30-year term, an interest rate of 7% p.a.
Let's compare the different repayment frequency and their repayment amounts.

You can see from the table above that in the scenarios where you pay fortnightly and weekly you save a VERY small amount in interest cost over 1 year. However, the hidden and long-term effect of repaying your loan either fortnightly or weekly instead of monthly, is that over time as you are making more repayments more frequently towards the principal of your loan, and so in turn your loan is repaid quicker which could cut your loan term down by 3 years!

2. Increase minimum repayments

Another, and one of the more impactful ways to repay your mortgage faster, is to make additional repayments on top of your normal repayment amounts.

Banks will allow customers to make additional repayments to their mortgages up to a certain limit without any penalties. However, you should be aware and always seek advice from your mortgage adviser surrounding changing your repayments because if you wish to repay more than the bank's limits there could be early repayment fees/charges.

The additional repayment amounts vary from bank to bank with some allowing a percentage amount above a customer's minimum repayments e.g. 20%, whereas others will state a specific dollar amount e.g. $200pm.

This can generally be actioned via your internet banking or mobile banking app, but for any repayments you want to make above and beyond the bank's allowable repayment limits you will need to go direct to the bank or through your mortgage adviser to get approved.

Note; some banks require you to commit to additional repayment amounts for the remainder of your fixed term. Again, it is best to check with your mortgage adviser before proceeding.

So how do additional repayments affect your mortgage?
Well firstly any additional repayment goes directly towards the principal of the loan, meaning you are directly paying down/reducing your mortgage amount and so it reduces the amount that interest is calculated on. This means that you will be paying less interest over the life of the loan.

How does this look in practice? Well firstly let's look at a scenario where we make increased payments above your regular monthly repayments.
Let’s consider a mortgage of $500,000, with a 30-year term, an interest rate of 7% p.a., monthly repayment frequency, and additional repayments of $200pm.
With these additional repayments the interest saved is $133,561 over the life of the loan and the term is reduced by 4 years and 10 months, meaning the loan is repaid in 25 years and 2 months opposed to 30 years!

Loan Term Calculator - Lateral Partners

3. Making lump sum repayments

For lump sum repayments most banks allow their customers to make lump sum repayments on the anniversary of the home loans start date. For example, if you obtain a loan on the 1st of August 2024 then you could make a lump sum repayment on the 1st August 2025, and again 1st of August 2025, etc etc.

Again, banks have a limit on the amount you can lump sum repay which for most banks is 5% of the remaining loan amount and a minimum of $1,000.

Next let's look at the effect of making annual lump sum repayments towards the mortgage with the same metrics.

$500,000, with a 30-year term, an interest rate of 7% p.a., monthly repayment frequency, however, instead of paying $200pm additional each month we save it over the year and pay in a single lump sum.

The accumulated funds are $1,400 over 12 months + possibly some savings from a savings account.

You end up saving $71,496 in interest cost over the life of the loan and the term would be reduced by 2 years and 7 months, meaning the loan will be repaid in 27 years and 5 months opposed to 30 years!

Amortization Calculator - Calculator.net

You can see that in both scenarios we end up paying less interest and we end up reducing the loan term by a significant amount.

Making additional repayments to your regular repayments is the superior option out of the 2 as the principal is repaid quicker and so the interest calculated to be paid is less, however making lump sum repayments each year is also a great option as it achieves a similar goal.

4. Offset Facility

In a previous blog we spoke about different home products including Flexi/Revolving Credits and Offset facilities and how they work, so I would suggest having a read here first if you do not know how these two home loan products work.

Utilizing an Offset Facility is another great way to repay your mortgage faster, HOWEVER, an Offset Facility isn’t suitable for everyone and needs to be used correctly to maximize the benefit of this home loan product.
To recap how a Offset facility works, it is a Home Loan product which has a floating interest rate in which you can link multiple transactional and savings accounts to Offset the loan to reduce your overall interest cost. The important thing to note is that an Offset Facility is it is designed so that you repay your mortgage faster, so even though you save on interest cost your repayment doesn’t reduce just a greater portion goes towards the principal.

How does this look in action?
If we consider the same metrics as we have used in the previous examples.
$500,000 mortgage, with a 30-year term, an interest rate of 7% p.a., monthly repayment frequency (as required under an Offset facility), but we consider a portion of the loan on a $50K Offset facility fully drawn or -$50,000 we get the following.

$380pm is the minimum calculated repayment and will remain at this level every month until the loan is repaid.

In this scenario after month 1 the Offset Facility loan balance would be $49,970 as of the $380pm repayment only $30 of this is principal.
If we then consider the scenario where you have $30,000 cash savings throughout your transactional accounts which are linked to your Offset Home Loan, we calculate the following repayment numbers.

You will see that the interest cost is reduced by $240pm, however this difference isn’t put back into your back pocket, but as the monthly repayments stay the same the difference is put towards the principal of the loan meaning that the balance of the loan after month 1 would decrease to $49,760
If you consistently kept $30,000 across your Offset linked bank accounts this would reduce your loan term by 12 years and 1 month and would save you $81,988 in interest costs!
As your linked bank accounts fluctuate this will affect the amount of interest you will pay and in turn the amount that is contributed towards the principal of the loan and how quickly this is repaid. The more money you have in those linked Offset Facility accounts the quicker you will repay this loan.

5. Flexi/Revolving credit + additional repayments

Another home loan product to consider when reducing your home loan term is a Revolving Credit facility which is similar to an Offset Facility, however instead of having savings in different accounts linked to the Offset account you directly input your cash funds into the Revolving credit facility to minimize your interest cost. Again, a Flexi/Revolving Credit isn’t suitable for everyone and needs to be used correctly to maximise the benefit of this home loan product.
By setting a portion of your home loan as a revolving credit you can minimise the amount of interest you pay on that portion of your loan.

Note: The below considers a non-reducing Flexi/Revolving Credit.

Let’s consider the same metrics as noted in option 2.
$500,000, with a 30-year term, an interest rate of 7% p.a., monthly repayment frequency (as required for a Revolving Credit Facility), however instead of the full $500,000 being on a Fixed mortgage lets set $450,000 on a fixed 7% mortgage and $50,000 on either a Flexi/Revolving Credit facility with a floating interest rate of 8.64%.
If we consider the scenario where the RC is fully drawn down on e.g. -$50,000, we get the following repayment amounts.

If we then consider the scenario where you have $30,000 cash savings which you have either put into the RC account or have sitting in your Offset linked accounts, we calculate the following repayment numbers.

The difference in monthly repayments between the two scenarios saves us $216 in interest cost!

Note: This interest cost savings will vary depending on the amount of cash savings you input into the RC.

Now this interest cost saving doesn’t directly translate into a reduction in your mortgage term, however if we then adopt lump sum payment strategy of increasing our regular repayments by this interest cost savings amount ($216pm), we are able to reduce the overall loan term as follows.

We can see that by increasing our repayment amounts by $216 (the interest cost savings amount) we save $138,178 in interest over the life of the loan, as well as we reduce the loan term by 5 years and 7 months, meaning we would have repaid the loan in 24 years and 5 months!

There are a number of ways in which you can repay your mortgage faster, but not every option is suitable for every person as each person have different financial needs & goals and so it is important that you speak to your Mortgage Adviser prior to making any changes to so that they can analyse and advise on the best option for your specific circumstance.

If you have any questions, don't hesitate to reach out!