How to manage your mortgage and pay off your home loan early

Fixing your mortgage rate can give you certainty about your repayments. But even if your mortgage is fixed, you can typically increase your repayments somewhat above the required amount without getting hit with a penalty.

For example, your mortgage repayment may be $3000 a month, but you may be able to repay as much as $3500 on your fixed mortgage without breaking the deal. Check with your mortgage broker or lender.

How much difference could this make for you? Looking at our mortgage calculator, on a $500,000 loan at 7%, your required repayments would be $1630 a fortnight. You’re on the hook to pay $560,000 just in interest over a term of 25 years – paying back over $1 million, more than twice the initial loan amount. Ouch.

But if you add $100 to your repayment each fortnight, your interest charges come down to $469,000 – saving you more than $90,000 in interest, with the mortgage finishing close to 3 years earlier. Add $200, and you save $154,000 and shave 5 years off repaying your loan. Much better.

How much interest you could avoid by topping up repayments on a $500,000 loan @ 7%

If you repay your mortgage monthly with 12 repayments a year, consider switching to fortnights – but pay half your monthly amount. Because there’s 26 fortnights in a year, you’ll end up paying the equivalent of 13 monthly repayments each year.

How much could you save by doing this? On the $500,000 loan at 7% over 25 years, repaying $3534 monthly will mean you pay $560,000 in interest. If you halve that repayment to $1767 every fortnight, your interest plunges to $443,000 – close to $117,000 less in interest, and you finish repaying 4 years earlier.

How much interest you could avoid by paying fortnightly on a $500,000 loan @ 7%

(Note that if you ask the bank for a fortnightly rate they will give you an amount that works out roughly the same each year as the monthly rate – you specifically need to ask to pay half the monthly rate. It’s the same on our mortgage calculator – enter half the monthly rate and then select fortnightly to see the results.)

When (not ‘if’) mortgage rates come down in the future, you could find yourself able to remortgage with a much better deal. Many of us will see this as a way to have extra play money because of the lower repayments, but it’s actually the perfect moment to keep your repayments constant – you’re used to them, after all – and save immensely.

For example, let’s say on that $500,000 loan at 7% over 25 years, you keep your repayments at $1630 a fortnight and then refinance to 6%. How much of a difference would this make? At 7% you’d pay $560,000 in interest, while at 6% you’d end up with an interest bill of $370,000 and finish 4 years earlier. That’s $190,000 in interest saved!

How much interest you could avoid on a $500,000 loan @ 6% instead of 7%

May it happen to you often: you come into some money via winnings, an inheritance, selling a business, or a welcome gift. While a huge lottery win might allow you to erase your mortgage entirely, even smaller lump sums can make a sizeable difference to your loan repayments.

Say if you dropped $30,000 in one go on your $500,000 mortgage (7% over 25 years). Doing so while keeping your repayments constant would see you finish 3 years early and pay $438,000 in interest overall – that’s $122,000 less. Not bad at all.

How much interest you could avoid by repaying $30,000 on a $500,000 loan @ 7%

Lump sums are best paid onto a floating rate mortgage or just after a fixed rate ends, to avoid any penalties for overpaying too much.

In short, no. Mortgage rates follow the OCR (Official Cash Rate), which historically has tended to rise gradually and plummet quickly. This time around it’s risen dramatically, and for many who are ending fixed-rate mortgage terms, the leap in expense will be shocking. It’s best to talk to you your lender if you think this will cause financial stress, but other options and support are available.

It helps to be proactive, and it sounds like you are looking ahead and planning. Talk to your lender first, to explore options such as stretching your loan term or switching to an interest-only mortgage for a while to get through. For more support, we highly rate the team at MoneyTalks – you’ll reach them on 0800 345 123, help@moneytalks.co.nz or text 4029.

It’s important to know that you typically can overpay up to a certain amount without triggering a penalty or jeopardising your fixed rate. Ask your mortgage broker or lender about your options. This is definitely worth exploring to take advantage of both the steady rate and the potential savings in interest. Even small overpayments make a sizeable difference.

Lump sums are best built up to be used precisely when your fixed rate finishes – this way you don’t break the terms of the fixed rate, but still benefit from the lump sum reducing your interest significantly. It’s definitely worth doing.

This strategy is typically for those who would like the certainty of a fixed rate, but who also want to have the flexibility to reduce their mortgage by overpaying. The idea is you place a portion of your mortgage on a floating rate to funnel any extra cash to, while keeping the rest on a steady rate to enjoy that predictability.