The dream for many Kiwis is to pay off that home loan, pronto.
In this blog, NZHL Hamilton Business Owners Carey and Rachel Varcoe discuss prioritising your home loan, and the impact of paying off your home loan sooner and share their advice for home loan borrowers.
Managing your Home Loan.
A year ago, the New Zealand property market was booming with low-interest rates and a big sense of FOMO (fear of missing out) driving sales. But now, we’re seeing a significant drop in house prices and homeowners being hit with much higher interest rates and general confusion around their best options when refixing.
Managing your home loan is a bit like running a business. To be financially viable, you need to be prepared with a robust plan and an accurate balance sheet – so you know your numbers (income and expenses vs. budget) and how they will affect your goals.
Unfortunately, many homeowners have never had their home loan properly explained to them, particularly around decisions made about their ability to lend, the technical aspects of home loans, and their options to pay back their loan.
Often we find new clients have no idea who their bank manager is or who to talk to about their loan and how their repayments are going which is problematic when trying to pay down your home loan.
Home loans don’t fit into a box and work best if they are personalised for you – some borrowers have a big chunk of their loans on floating rates because it’s the best fit for their financial goals, while others require the security of fixed-term rates.
Everybody’s different. We don’t all look the same, and a home loan shouldn’t either. It’s about personalising – if you’re looking to sell soon, head overseas, or grow your family, these all impact how you structure your loan and channel your money to reduce your interest costs.
So, what is the solution?
Ask an expert.
Your NZHL Mortgage Mentors are qualified financial advisers who can help you personalise a plan that considers your goals. But you need to pull all the skeletons out of the closet. To help, we need to know as much about your life, your plans (buying, selling, investment properties), and your current financial situation (including debts) to ensure you’re set up with the best solution from day one.
Refinancing your home loan to a new lender (or the structure of your home loan) is a change process and can seem overwhelming. But, with the right personalised service, the outcome truly is financial freedom, faster.
It’s all about where you want to be before retirement, celebrating success sooner rather than later, and avoiding that mid-life panic. Imagine not having to pay your mortgage – what could you do with that money?
And remember, if nothing changes, nothing changes. Without going through the process of reviewing your home loan and committing to a plan to pay it off quicker, you’ll remain on track to pay your home loan for the standard 20 – 30 years.
That’s where we come in, as your Mortgage Mentor we’re here to help throughout the entire process from tailoring your plan to monitoring, reviewing, and altering when needed.
Essentially, once you get rid of your mortgage, you have more options and fewer constraints on your finances.
Currently, a couple of lenders offer lower 1-year fixed rates which may seem tempting if you’re coming to the end of a fixed term. But consider, what happens at the end of the year?
It’s important to take a good look at the offer in front of you to weigh up the short-term savings (how much the lower interest rate will actually save you over the year) over the longer-term impacts on the cost of your home loan. For example, can you save more (for longer) in interest costs using offsetting facilities?
Leaping at short-term lower rates to solve cash flow issues is not a solution. It’s purely a plaster. You’re better off talking through long-term solutions and getting your structure right to make the best use of your money in the long term. It’s likely not as bad as you think but you need to take the bull by the horns, take back control by making a plan, that works, and then review and monitor that plan.
Within your home loan structure, we encourage clients to put aside funds to make a lump payment each year. This doesn’t have to be a humongous amount – starting small is best because it has to be affordable. If you can save $10 a pay or $500 per year, that’s $500 you won’t need to pay interest on moving forward, which makes a very big difference throughout your loan.
Plus, when faced with higher interest rates – reducing your home loan with a lump payment will limit the pain of increased repayments.
Food for thought.
In the meantime, here are a few tips to consider:
– Look in the mirror – where’s your money going? Are there areas you can cut back – for example, if you love takeaways, think of the difference halving your takeaway spending can make.
After all, my (Rachel’s) mother used to tell me ‘Look after the pennies, and the pounds will look after themselves’. Meaning, it’s the small amounts that add up.
Usually, we purchase smaller items without much consideration – most people have no idea where their ‘junk money goes. When you start to go through your bank statements, you’ll see how much you’re actually spending.
– Stick your credit card in a metal container of water and freeze it. If you want to use your card, it has to defrost first, giving you time to consider if you really need to spend the money.
– Put aside a dedicated amount of money (start small) and build up these savings to make an additional payment on your home loan. Watching the money grow (and your debt reduce) feels good!
– When lower interest rates are available, try keeping your repayments the same as if you were paying higher interest. You’ll build up your equity and cushion the impacts of the next interest rate cycle.
In the current upheaval, it’s important to remember while we can (and should) use economist predictions to plan, with a lot of different elements at play, their predictions aren’t set in stone. So if it happens it happens, but ultimately it’s not the rate you pay, it’s the rate you pay it off.
Come in for a no-obligation chat, let’s see how quickly you can say goodbye to your mortgage, you have nothing to lose.
Please note – Carey and Rachel Varcoe are Local Business Owners and Mortgage Mentors at NZHL Hamilton and have written this blog based on their experience. This blog is intended to be general in nature and should not replace personalised financial advice by your mortgage adviser.