Managing a mortgage - Paying it off

Reviewing the mortgage

It's a good idea to check things like your level of repayments and interest rate from time to time. It pays to do it every year or two, or when:

• A fixed rate loan is about to expire
• The interest rate on a floating rate mortgage changes
• There’s a big life change on the horizon, such as starting a new job
• You get a big lump sum such as an inheritance

It helps to take a moment and ask – are these mortgage payments still as big as I can comfortably afford? Check the budget to see if there’s spare money to put toward extra repayments. 

Even boosting repayments by the equivalent of $25 a week may save thousands of dollars in interest, which means you could be mortgage-free months or even years earlier!

See how much difference increasing those repayments could make with this mortgage calculator. 

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It usually makes better financial sense to put cash towards reducing a mortgage rather than into a savings scheme. However, the main exception to this rule is KiwiSaver because of the incentives it offers. You’d miss out on contributions from your employer, the government and the market if you stopped making our own contributions.

Apart from KiwiSaver, you can also put savings towards an emergency fund while you repay the mortgage. It’s worth doing.

Guide to saving

Topping up your loan

This can reduce your monthly outgoings considerably. However, the thing to watch out for is whether you end up paying more because the debt drags on for longer.

To make this work, you'll need to increase your mortgage repayments to keep the payoff date the same as before.

If buying a car, for example, the idea is to make the repayments high enough to pay off the cost within the expected life of the car – generally around five years.

Guide to debt consolidation

Refinancing: changing loans or lenders

Sometimes, changing the structure of your mortgage could save you money. You might switch some or all of your loan from a floating rate to a fixed rate, for example. Or take your mortgage to another lender.

Before changing, it helps to look carefully at the costs and possible savings. Your existing lender, another lender or a mortgage broker could help.

If it would take a long time for the savings to outweigh the costs, you probably should be cautious. Other things like interest rates could change in the meantime.

Switching from one type of loan to another with your existing lender might come with a fee of a few hundred dollars, which you could try to negotiate down.

Shifting your home loan to another lender may or may not cost a lot more, depending on the lender, the deal being offered and your circumstances.

A mortgage broker can help negotiate for you if you haven’t got the time or skills to do this.

Possible costs typically are:

• Early repayment fees if the loan is on a fixed interest rate
• The application fee a new lender might charge
• A legal bill and possibly a valuation bill

Not all of these costs always apply. Lenders will often bend over backwards to get a new client, sometimes waiving an application fee, contributing to your legal fees or not requiring a valuation. The key is to get any offers in writing and compare them before making a decision.

Repayment holidays

Some mortgages allow you to take a ‘loan repayment holiday’ or ‘mortgage holiday’ for up to three months. You don't pay anything during this period, but interest is still charged to the mortgage.

This means that, unless you lift your repayments after the holiday, the mortgage term ends up extending longer and you pay more in interest overall. That’s why repayment holidays are best used only as a last resort.

What if I can't manage?

Use our money planner to make a budget.

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Get help

For free budgeting advice, find a nearby financial capability (budgeting) service.

Contact the lender

If it looks like you might miss a mortgage payment, get in touch with the lender right away. They’ll be able to tell you what the options are, such as paying interest-only on the loan for a few months until you've got your finances back on track.

Mortgagee sales

If there is no way you can keep the mortgage going or you walk away from it, the lender may take your home to a 'mortgagee sale' to recover their money. Any money left over from the sale after all the costs are met will be paid to you.

• If you've borrowed too much and the value of the property has fallen, you may end up with 'negative equity', where the money you owe is more than the home is worth.
• If there isn’t enough money from the mortgagee sale to repay the mortgage, the lender may take action to get the rest of the money from you. This can lead to bankruptcy.

Your bank may be able to claim any money you hold in other accounts if you are behind in payments – this depends on the wording in your mortgage documents.

The lender can (and probably will) also pursue any other person who has guaranteed your loan.

Mortgagee sales can usually be avoided if you take action quickly. If you know you can’t continue to make repayments, a good option is to talk to the lender first. If the outcome is that you decide to put your property on the market, you can avoid the stigma of it being advertised as a ‘mortgagee sale’.

Insuring a mortgage

Mortgage protection insurance bought as life cover pays out enough on your death to cover the amount of your mortgage. It can also be bought as mortgage repayment insurance, which will cover regular mortgage repayments if you can’t work because of illness or accident.

Some policies, such as those offered by a bank, may have restrictions – especially for self-employed people. Advice is available from either an independent insurance adviser or a broker.

Guide to different types of insurance