Pay what you can afford to
First off, you need to make sure your regular repayments are set at an amount that will be affordable for you. Be realistic and factor in any expected lifestyle changes, like a child, or a change in income.
Pay more than the minimum
If you can comfortably afford to pay more than the minimum, you might like to consider increasing your regular repayments. If you do, you could pay your loan off faster and pay less interest over the life of your loan.
Move to fortnightly or weekly repayments
If you pay monthly, consider whether you could pay half of what you are paying fortnightly instead. This means you’ll repay slightly more over the year as you will be paying the equivalent of one extra monthly repayment a year.
For the purposes of illustration take for example, if your monthly repayments are $2,400, consider whether you could pay $1,200 a fortnight instead. Based on a loan of $400,000 at an interest rate of 4.00% p.a. that remains the same for the loan term of 30 years, this would reduce your total interest cost by around $23,000 and you’d pay your home loan off 2 years earlier.
Round up your repayments
If you’ve chosen a set loan term, the required repayments are often not round numbers. You could round them up to the nearest $10 or even $100 to pay a bit more with each repayment.
For example, if your minimum fortnightly repayments are $877.67, consider whether you could pay $900 instead. Based on a loan of $400,000 at an interest rate of 4.00% p.a. that remains the same for the loan term of 30 years, this would reduce your total interest cost by around $15,000 and you’d pay your home loan off 1 year and 4 months earlier.
Paying off your home loan faster is a great goal. However it is important that you consider it as part of your wider savings and financial goals. Other things to consider are the impact on your KiwiSaver contributions, or your savings and things like insurance.
Increasing repayments will suit some people, and not others.
If you aren’t sure, talk to your bank or financial adviser. That applies whether you are considering increasing your payments, or are concerned about your ability to meet your current commitments.