Now's a good time to cut thousands off your home loan

Economists think it is increasingly likely the Reserve Bank will lift the Official Cash Rate before the end of the year.

That will mark the end of what have been the lowest interest rates we have ever seen in New Zealand.

And it’s why we think it’s the perfect time for home owners to consider whether they should increase their repayments to pay off their home loan faster.

It could save thousands of dollars and may reduce the life of their home loan by a number of years.

It always important anyone with a home loan understands interest rates can change.

And if they can afford to, we think they should consider increasing their payments while rates are still at historically low levels.

To illustrate, here’s an example of how much you might save.

Let’s say you have a home loan of $400,000 at an interest rate of 4.00% per annum that remains the same for thirty years, and your weekly repayments are set at $440.

If you increased your repayments by $30 a week from the beginning of the loan you would reduce your interest costs by about $37,727 and pay the loan off 3 years and 5 months earlier.

If you increase your repayments during a fixed rate period your bank may charge an early repayment fee - find out how much that might be and work out whether it still makes sense.
 

If your fixed loan is about to expire that would be a good time to consider your repayment levels.

Reserve Bank figures show that as of May there was around $315 billion in loans secured by a residential mortgage. About 87% of this lending was fixed, with about three quarters of this fixed rate lending due to roll off within twelve months.

So if you’re on a floating rate or your fixed rate home loan is about to rollover, this is a good time to think about increasing your payments if you can.

There are several ways you could do this, here are a few home loan ideas from me:

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.