Paying the mortgage off faster

Personal Finance

Try our handy calculator that shows how much you save when you pay a home loan down faster - and it is usually much more than you might imagine even when interest rates are very low

15th Sep 20, 9:17am by David Chaston

When an 'expert' offers advice about how to save money on your mortgage, invariably at least one 'idea' involves paying down the loan faster.

There are many angles to this strategy, some you may not be aware of. (One popular 'secret' is making two-weekly payments instead of monthly payments - thereby making 26 'half' payments a year instead of 12 full ones, and paying down effectively one full month extra.)

But in the end, these strategies all just amount to paying more sooner.

If you have the capacity, have the discipline, and really just want to pay your loan off faster, it helps to know how much extra you need to pay to achieve a faster paydown.

We have a simple calculator that can give you a fast indicative answer. See here.

This calculator shows you how much you need to pay to extinguish a mortgage over various lengths of time. Obviously, the more you increase your repayment amount, the shorter it will be to become mortgage-free.

Even when mortgage interest rates are relatively low, the amount of mortgage interest you pay over a very long period can actually be very large. If you repay monthly over 30 years, you will pay as much interest as in principal when the interest rate is 5.3%. It is not as fierce at lower interest rates, but it is still huge.

The most effective way to 'save' interest costs is to reduce the term - that is much more effective than shaving a bit off the rate.

This calculator shows how much you will pay for each of six set terms, from 5 years to 30 years, and how much you will need to pay with each repayment to achieve these goals.

Of course, the difference between the amount you borrow and the repayment "Total Amount" is of course the interest you will be paying. The shorter the loan, the small that interest cost. That may seem obvious, but the amount of interest you can avoid will probably surprise you.

Try the tool here.

*This calculator was developed by Calculate.co.nz and is in our calculator toolbox as part of our partnership with them.

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

38 Comments

by printer8 | 15th Sep 20, 10:23am 1600122181

Paying down the mortgage is not only about saving money but also about being prudent and especially so for recent FHB.
There is always risk due factors which can be either at a personal or a wider economic level.
Despite Covid, the short term for the those with income and job security the outlook may be good in terms of both buoyant house prices and continuing low interest rates.
However, in the medium to longer term there is some risk of increasing mortgage rates as a reaction by RBNZ to rises in inflation.
Even a small increase in mortgage rates could stretch those who through necessity have had to recently take on exceptionally large mortgages. A 2% rise in mortgage rates would see an additional $12,000 annual interest increase on that $600,000 loan - that is an additional $460 per fortnight out of the wage packet.
Personal factors - whether it be sickness, accident, loss of job, marital issues or redundancy of one or the other partner - are usually unexpected shocks. Being in advance of the mortgage with a small revolving element is a better investment than having money sitting in an emergency fund.
There is a tendency for FHB to spend money on their home (driven by the intrinsic value of home ownership) but they would be well-advised to initially pay that mortgage down.

by CourtJester | 15th Sep 20, 3:29pm 1600140549

I'm so confused... You've been repeating over and over that owning a house means financial security. Now you're telling me there are risks?

by printer8 | 15th Sep 20, 3:50pm 1600141815

Court Jester
Cheers mate. Not worth responding to.

by CourtJester | 15th Sep 20, 4:01pm 1600142468

Thought so. Nobody likes to explain why they're contradicting themselves.

by FCM | 15th Sep 20, 11:26am 1600125964

Agree, being ahead of the game will give you breathing space if something like you mention has happen.

by Pragmatist | 15th Sep 20, 12:07pm 1600128465

Not really worth paying it down any faster than you need to these days.. gone are the days when every extra dollar you paid at the front-end of the mortgage saved you 3 dollars in interest. Now every dollar you pay off at the front of the mortgage only saves you ~60c in interest.

(of course interest rates might go up further down the track.. so there is that risk)

by Nzdan | 15th Sep 20, 12:37pm 1600130239

Sure the extra dollar at the front might save you less overall than it used to, but a loan is a loan and the quicker you pay it down the more equity you have to upgrade with.

I've just increased my payments to a 13 year schedule down from 25 years. Short term goal is to whack 1/3rd off the mortgage and then upgrade from there. Understand some people would prefer to invest the extra dollars elsewhere for a better return, if I had a clue about investing that might be feasible.

by Pragmatist | 15th Sep 20, 5:13pm 1600146792

Putting the extra repayment money into a bank account/investment fund is still realizable equity when it comes to upgrade time. I wouldn't go reducing payments to pay the minimum, keep the payments the same amount as the rates fall and your mortgage will shorten itself anyway. I sure don't see any reason to smash every extra dollar into the mortgage at these rates.

by Lanthanide | 15th Sep 20, 8:46pm 1600159601

Putting the extra repayment money into a bank account/investment fund is still realizable equity when it comes to upgrade time.

Except you pay tax on any investment returns on that money. Whereas if you pay down your mortgage, you pay less interest so save money, but there's no tax to pay on an interest saving and when the house is sold there's no tax on the equity you have in it either.

Or in (really wonk) numbers terms: save $10,000 and after 5 years you might have $10,500 after tax. But pay of $10,000 lump sum on your mortgage and after 5 years you'll have an extra $11,500 in equity in your property (from both the initial $10k principal repayment and lower compounding interest over the 5 years), which when the property is sold to upgrade, is not taxed in any way.

It's why offset mortgages are great: instead of earning some paltry 1% return on my cash in the bank, and then getting a 33% tax on that, my savings offset my mortgage, so I save 3.55% interest on the money I have and there's no tax on that savings. Before Kiwibank launched their Offset mortgage product, they actually asked for an official determination from the IRD that this product did not constitution tax evasion, and IRD agreed it did not.

by Pragmatist | 15th Sep 20, 7:14pm 1600154076

Depending on exactly what you invest in, ie, invest directly in shares, or in a PIE fund, and you only pay tax on any dividends paid by your investments, you don't pay tax on the capital gains. So invest in something that is capital gain targeted rather than dividend paying shares.

by Lanthanide | 15th Sep 20, 8:50pm 1600159829

Technically if you're investing for the purpose of capital gains, you have to pay tax on the capital gains. IRD would have to prove it though.

by CrispyKahawai | 15th Sep 20, 11:06pm 1600168007

Good to know. Thanks mate.

by Uh Oh | 15th Sep 20, 12:24pm 1600129449

Little over simplified...
There are more effective ways to pay down a mortgage than simply increasing the frequency of payments or reducing the term, which of course do work... but with varying degrees of impact
The most effective of the two is reducing the term, the problem with this strategy is that it directly impacts your free cash flow, and once that money is paid to the mortgage it's gone

By far the most effective strategy is making regular "principal only" payments above the normal mortgage costs, in the early years this can reduce the amortized interest dramatically and shorten the loan length by up to 70%
There are many ways to achieve this which require more than a few sentences to explain

by Jackson.D | 15th Sep 20, 2:10pm 1600135840

I'd be quite interested to hear more about this strategy.

by murray86 | 15th Sep 20, 2:38pm 1600137484

One of the easiest - a friend recently came to the end of a fixed interest term, and the interest rate halved for him. He kept the payment rate the same to take more off the principal. He had got used to not having the money, so it made sense to just keep it that way.

Another point that few discuss; when you buy a house say with 10% deposit, at the beginning you actually only own 10% of it. The bank has the other 90% and the terms of your mortgage spells out how that balance transfers to you over time. Having the ability to pay more against the principal is an important way to transfer that ownership faster without incurring cost, and in fact save considerable money.

by Lanthanide | 15th Sep 20, 5:42pm 1600148573

Having the ability to pay more against the principal is an important way to transfer that ownership faster without incurring cost,

Although most fixed-term mortgage interest rates come with a clause that additional repayments will attract an early repayment fee.

by Theoracle | 15th Sep 20, 10:09pm 1600164558

Yes but most fixed term mortgages allow 5% or similar of the loan value in lump sums without a fee.

by youngdumbandbroke | 15th Sep 20, 2:15pm 1600136139

That's what we do and have already shortened the length significantly

by ham n eggs | 15th Sep 20, 12:44pm 1600130687

poor advice
money = debt is losing buying power
no point forsaking buying power today by reducing debt

by upnorth | 15th Sep 20, 3:39pm 1600141158

We've made a concerted effort over the last several years by paying down debt. Had a revolving credit mortgage and any extra was put on repaying the debt. Just gone mortgage free in the last month. Feels really good having no debt. Economy and house prices can do what they like. We dont have to worry at all now. Living expenses are our only out goings. Best thing we ever decided to do.

by Brutus Iscariot | 15th Sep 20, 4:08pm 1600142891

Feel like in this day and age you want to run with the highest leverage possible - every effort of government and central bank will be undertaken to bail you out, and you turbocharge your returns in a tax free asset class.

by Property Leader | 15th Sep 20, 4:23pm 1600143808

I love the comments. It would be better for the writer to explain some of the mathematical tools that can be used to study the science of money. All of life is a risk with the biggest one being death at the end. Debt can be used wisely and foolishly. The higher the debt at time of purchase the better the property and that results in a better home and this results in a better life style. Paying off debt ASAP to permit multiple property purchases is the smart way to go.

by MortgageBelt | 15th Sep 20, 5:44pm 1600148685

Having some of your home loan on revolving credit can allow you pay down faster, while still being able to redraw in emergency or need.
If you don’t like paying the higher interest rate on Floating/revolving then repay 20k or so by credit card then balance transfer onto 1.9% or zero% for a year or 2.

by Due Diligence | 15th Sep 20, 6:53pm 1600152804

My properties are on interest only, have been for years. That money can earn more than the mortgage interest rate invested elsewhere. And inflation (MIA currently) eats away at the mortgage, so strategically it is better to pay it off all at once after 30 years or so.

https://www.oneroof.co.nz/news/36379

by al123 | 15th Sep 20, 7:29pm 1600154970

That's a very risky strategy if you're talking about the family home. The Guardian has lots of articles on endowment mortgages where people got themselves into real trouble pursuing that kind of strategy when it turned out their investments didn't actually perform as well as they were expecting.

by Due Diligence | 15th Sep 20, 8:14pm 1600157696

Where do you think the risks lie? Have you thought through the advantage that 30 years worth of inflation affords you when paying it off lump sum at the very end? And the fact that that other investments yield higher income that the interest of a home loan?

by Nzdan | 15th Sep 20, 8:24pm 1600158282

Can you refinance Interest Only ad infinitum? I thought banks only provided this welfare for up to 5 years?

by Due Diligence | 15th Sep 20, 8:48pm 1600159715

I’m on 15 years with Westpac.

Think of paying off a 100% mortgage from 1970 in 2005. Entire thing would equate to in the order of 1.5 years income in 2005.

by HeavyG | 16th Sep 20, 7:49am 1600199345

How is it "welfare", bank is getting paid interest on the loan balance.

by al123 | 15th Sep 20, 8:31pm 1600158713

Yes, I understand the theory. And you are right that if things go as expected, you will end up better off. But carrying debt does carry risk, however you slice it. Inflation is likely, but its not a guarantee that there will be inflation rather than deflation. There's also a risk that the share market will not perform as well as expected, or that it will crash right when you need the money. Or that you lose your job, and can't go interest only as a backup because you are already on it. Or that you get divorced and have to sell at s point where the timing is really bad. There's also human nature to take into account - if, say, you're putting what would be your mortgage money into shares, you might be tempted to skip this months deposit for one reason or another, then you do it another month, and so on. That might not be something you are likely to do, but a lot of people might struggle to be that disciplined.

by Due Diligence | 15th Sep 20, 8:42pm 1600159334

You need to think about the probability of those things occurring over the long term. An when doing so don’t be a moron like 95% of the commenters on here who are scared of their own shadow, refuse to learn from the past, and think that using past trends to inform future strategies amounts to witchcraft.

by al123 | 15th Sep 20, 8:53pm 1600159998

Decision theory is partly about the probabilities of the outcomes - but not entirely. To make it simple, imagine a lottery in which there are 10 tickets, each costing a dollar. One ticket will win a $20 prize. If someone offers you 5 tickets, should you buy them? Sure- you have a 1/2 chance of winning $20, so the expected utility of buying 5 tickets is $10, which is twice what they cost you. Now run the experiment again, but multiply all the numbers by 100 000. If you just look at the expected utility, you should spend 500k on lottery tickets for the 1/2 chance of winning 2million. But I wouldn't do it. It's not just about the probabilities and the utility values. It's also about how much it would suck (and how badly it would affect your life) if you turned out to be wrong.

by Due Diligence | 15th Sep 20, 9:09pm 1600160955

Wouldn't be wise to wager that sort of money on 50% odds.

But what are the chances that there will be inflation between now and 2050? Or that house prices will be higher in nominal terms than they are today in 2050? Or that a growth share fund will yield more than average mortgage interest rates between now and 2050. Or that your income will be substantially higher in one, two or three decades than it is today. Unless govt shafts us by extending the retirement age, which they will, I’m set to retire 2051 and I like those odds.

by al123 | 15th Sep 20, 9:16pm 1600161381

It's not the specific odds that matter so much - it's how bad the loss would be. Imagine for example you are 65, have a comfortable freehold house and 1 million in the bank. What would the odds have to be for you to wager all of that for a chance to win 10 million dollars? If I was in that position, I don't think I'd take any bet - why risk losing it all just for the chance to have more money, when what I've got is enough to see me out in comfort?

Because even money has diminishing marginal utility. For someone with plenty (like our hypothetical 65 year old) more doesn't necessarily make a lot of difference to their quality of life. So it makes sense in that case to focus on minimizing losses rather than maximizing gains.

by Due Diligence | 15th Sep 20, 9:40pm 1600162802

If you don’t think the odds matter much, we live on different planets. But to each their own.

by al123 | 15th Sep 20, 9:59pm 1600163942

It's not my particular insight - it's an insight from decision theory. And it's not that the odds don't matter much ever, it's that focusing only on the odds and the expected outcomes (the expected utility) misses other things that are important: that's presumably why you would take the $5 gamble but not the $500k gamble, even though the cases are structurally the same. The point is that there is not one and only one rational way to approach decisions. It can be rational to simply go with maximizing expected gains - it can also be rational to go with risk minimization (especially when the stakes are high). Even if the odds are very high that you'll come out with more money in the end, it can be a rational strategy not to make the gamble. 'Each to their own' I guess is one way of explaining something else important- some people are more risk averse than others. This is not a matter of rationality necessarily- your risk appetite often just depends on your values and your character (some people experience regret more strongly than others for example).

by Lanthanide | 15th Sep 20, 10:34pm 1600166071

This is not a matter of rationality necessarily- your risk appetite often just depends on your values and your character (some people experience regret more strongly than others for example).

And your past experiences, and your expectation of how well you'd be able to recover from a loss. A 30 year old is likely to take a lot more risks in life than a 70 year old, because they have more time and opportunity to make up for any bad outcome.

by KH | 16th Sep 20, 9:04am 1600203892

Over decades I relentlessly paid down debt over various properties and business. It got exponentially better all the time.
With equity you get cashflow plus plus. With equity you get power and simplicity in your decision making.
Life got pretty sweet. On those grounds alone I have to recommend it.
DC's calculator underlines the brillance of compounding benefit. It's a classic "oldie but a goodie".