A guide to managing your mortgage

Once you have a mortgage, it’s a good idea to keep a regular eye on how it’s performing for you. You should revisit things every six months or so, just to ensure you’ve still got the best arrangements in place.

However, with everything set up on auto-payments and your budget fine-tuned for home ownership, it’s easy for your mortgage to become out of sight and out of mind. Sometimes the last thing you want to do is get involved in all that complication again.

But grit your teeth and do it. Why? Because even a small change in your circumstances or the mortgage options available can be an opportunity to save thousands in interest and knock years off your loan. Here are some tips to help you enjoy the benefits of a well-maintained mortgage.

When to review your mortgage arrangements

A mortgage could be the most expensive thing you ever have. The faster you repay it, the more interest you will save. Even increasing your regular repayments by $20 a week could save you thousands over the life of your loan. However, there can also be times when you need to reduce your mortgage repayments and slow things down for a while.

Here are some events that could indicate a review of your mortgage arrangements is due:

  • You seem to have plenty of money to spend
  • Variable interest rates have changed
  • A home loan is nearing the end of its fixed interest rate period
  • You’re about to get a change in pay or start a new job
  • You find out you’ll be receiving a large sum of money
  • Another lender seems to be consistently offering much better deals
  • You’re about to take on another major long-term expense, such as raising a child
  • You’re struggling to keep up with your regular mortgage repayments
  • You need money for an unexpected emergency
  • You find yourself with high interest debt, such as a car loan or credit card balance
  • You or your partner won’t be earning an income for a while
  • It’s been a year or two since you reviewed your finances with a trusted advisor

Faster ways to repay your mortgage

Looking for any opportunity to repay your mortgage earlier can save you thousands in interest over the life of your loan. Getting a little ahead with your repayment can also open up the ability to slow things down if your finances get tight in the future. Below are some tips to help you get started.
Increase your regular mortgage repayments

If you find yourself with plenty of spending money, it’s a good idea to consider increasing your mortgage repayments rather than splashing the cash. If you have a variable (floating) interest rate mortgage, you can do this at any time. Even if a mortgage is on a fixed interest rate, most lenders will let you increase your regular repayments by up to 20% of your agreed minimum, without an early repayment penalty.

Choose fortnightly repayments

Choosing fortnightly regular repayments, rather than monthly, is an easy way to make a couple of extra repayments each year. Paying half your monthly amount every two weeks means you’ll make 26 repayments a year and pay the equivalent of one extra monthly repayment.

Keep your repayments up when interest rates drop

If your variable interest rate decreases, or it’s time to re-fix a mortgage and lower rates are now available, keeping your regular repayments the same means you’ll repay more of what you owe each time. With less money owing, your next interest charge will be even less. Then your next regular repayment repays even more of what you owe, and so the snowball of saving starts rolling.

Make lump sum repayments whenever you can

If you get a windfall, like a salary bonus or an inheritance, using it to repay some of your mortgage means you’ll end up with much more money in the long run. Mortgage interest rates are nearly always higher than savings rates, so the mortgage interest you’ll avoid paying will be more than you would earn in a savings account. Plus your savings interest would be taxable as income.

How to avoid the fear of over-committing

Sometimes people are reluctant to get tied into paying off their mortgage faster. What if it’s simply not sustainable or something unexpected happens and you’re caught needing money?

One way around this is to set up a small offsetting mortgage for some of your borrowing and deposit the extra repayments you planned to make into a linked savings account. The money in this account is subtracted from your offsetting mortgage balance when it comes to calculating the interest owed. Although an offsetting mortgage has a variable interest rate (which is usually higher than fixed), if you keep it small the impact will be minimal.

As you gain confidence in regularly setting the extra aside, you’ll also be building a reassuring ‘emergency fund’ and still be effectively repaying your mortgage faster. You just need the discipline to leave the money in the offsetting account alone, unless there’s a genuine emergency and no other way to pay for what’s required.

Using your home loan instead of other finance

High interest debt, such as retail finance or an ongoing credit card balance, is best avoided. If you find yourself with this type of debt, or you’re considering using it, it usually pays to review your mortgage arrangements instead.

Mortgage interest rates are quite a bit lower, so borrowing against your home to repay or avoid high interest debt makes sense. You just have to try to repay the extra debt within the same time as you would otherwise have done. Leaving it unpaid in your mortgage and attracting interest for year after year can easily cost you more in the long run.

Even if you bought your home with a minimum deposit and a mortgage of 80% or more, chances are the value of your home has since increased. You will also have repaid some of the original mortgage (principal). That means you may still be able to increase your mortgage, without exceeding the loan to value ratio (LVR) restrictions.

When a fixed interest rate period comes to an end

If you’re busy and a mortgage is approaching the end of its fixed interest rate period, it’s easy to just re-fix it for the same period at the new rate and move on. But taking the time to consider your options before locking yourself in could save you a lot of money in the long run. It might also create more freedom to pursue new or revised goals. Here are some things to consider at this important time.
Could I make a lump sum repayment?
If you have a lump sum that could be used to repay some of what you owe, now is a good time to take advantage of that. At the end of a fixed interest rate period, a mortgage will revert to the variable (floating) rate, unless you provide other instructions. This means you can make lump sum early repayments without penalty. You can still re-fix if you wish to, after making the repayment.
Am I still with the best lender?
As your mortgage moves onto a floating rate, it gives you the opportunity to switch to another lender without an early repayment penalty. This can also put you in a good bargaining position with your current lender, if others are offering more competitive deals. Just be sure to factor in the potential costs, including legal fees, of closing out a mortgage with one lender and setting one up with another.
Which fixed interest rate period would suit me best?

Several factors come into choosing the best fixed interest rate period for you. These could include:

  • The comparative rates on offer for each period
  • What the rates might be like when each new period comes to an end
  • Whether rates are expected to rise or fall in the next year or so
  • Whether you expect to receive a lump sum, such as an inheritance, and should time the mortgage to be on a variable rate at that time so you can make a significant repayment
  • Whether you might want to restructure or repay your mortgages in the next few years due to a planned change in your circumstances, such as starting a family or selling up to move overseas

How to reduce mortgage repayments for a while

Although it will extend your mortgage and cost you more in interest overall, it’s sometimes necessary to bring your mortgage repayments down to something you can afford. If you ever think you’re getting close to missing a mortgage repayment, you should always talk with your lender as soon as possible. They’ll be keen to help if they can. Here are some possible options.

Increase the term of your mortgage

If you’re not already on the usual maximum of 30 years, extending your mortgage term can immediately reduce your regular repayments.

Reduce your repayments to the minimum

If your regular mortgage repayments are more than the required minimum, you may be able to reduce them until your circumstances improve.

Ask about switching to an interest-only mortgage

With this type of mortgage, your regular repayments only pay the interest owing each time and don’t repay any of the amount you borrowed. The maximum term for an interest-only mortgage is usually five years; then it reverts to a standard mortgage. This may give you the financial breathing space you need. It’s important to keep the term as short as possible, because you’ll keep paying interest on the full starting balance every time and your mortgage will be extended by however long you’re on interest-only.

Apply for a payment holiday

You may be eligible for the option to stop your mortgage repayments completely, usually for up to three months. During this time the interest charges are added to the amount you owe. At the end of the ‘payment holiday’ your minimum regular repayments may increase to get you back on schedule or you may be able to extend the term of your mortgage instead. Payment holidays are more of a last resort, but they became more common during the Covid-19 pandemic.

Finding money for an unexpected emergency

No-one can foresee the future with absolute certainty. Even the most careful financial planning can be thrown into disarray by life’s unexpected events. While building and maintaining an emergency fund is always recommended, sometimes it’s not possible or it’s simply not enough.
Increasing your mortgage

If you’ve owned a home for a while, chances are it will have increased in value. The balance owing on your mortgage should also have come down. The two effects combined will probably mean you could borrow more against your home without exceeding the loan to value ratio (LVR) limit, typically 80% for owner-occupier mortgages on existing homes.

However, increasing your mortgage will increase your regular repayments. Or it might extend your mortgage term, if the lender can let you keep the same repayments. Provided you can afford any increase in repayments, a larger mortgage may provide the emergency funds you require.

Repaying the extra loan as fast as you can

If you do borrow more for an emergency situation, it’s important to treat it as a temporary loan if you can. Although the interest rate on a mortgage is typically lower than other forms of finance, if you let the additional amount owing drag on for year after year the total interest cost will continue to grow. Even worse, if you simply add the emergency loan to your mortgage without ever increasing your repayments, the loan term will stretch beyond its original term.

Insurance protection for mortgages

For most people, insurance policies are available that provide different sorts of cover to ensure your mortgage is repaid, or your regular repayments are taken care of, if the unexpected happens.

Life insurance with mortgage cover
Some life insurance policies include a cover that pays out enough on your death to completely repay the balance owing on your mortgage. This can provide you with peace of mind. You’ll know your partner will be able to stay in your family home or it can be left mortgage-free to the beneficiaries of your will.
Mortgage repayment insurance

This type of policy typically covers your regular mortgage repayments if you are unable to work because of an accident or illness. Some lenders may require you to have this insurance anyway, particularly if you’re borrowing with a high loan to value ratio, such as 80%.

Mortgages for people with irregular income

If you’re a contractor, freelancer or seasonal worker – or you’re about to become one – your income may not be consistent. This can make regular mortgage repayments a challenge, unless you let money build up in low-interest accounts to cover low income periods. You may also collect GST and pay it to Inland Revenue every two months, along with quarterly provisional tax payments. If this sounds like you, there are two mortgage types you should probably look into.

Offsetting mortgages

These mortgages let you use money in linked savings accounts to reduce your mortgage balance when it comes to calculating interest. So you could have an account your income goes into, another that you use to set aside GST and a third to set aside your provisional tax. The accounts stay separate, so you don’t have to worry about accidentally dipping into them.

The mortgage interest is calculated daily and paid monthly, along with your agreed minimum regular repayments. So the money in the linked accounts is helping to reduce your interest owing. Mortgage interest rates are nearly always higher than savings rates, so the interest you avoid (save) by offsetting will be more than you would earn in a savings account.

Offsetting mortgages have a variable interest rate, which is usually higher than fixed rates. A smart way to counter this is to split your borrowing between an offsetting mortgage and a fixed interest mortgage. By keeping the offsetting mortgage to about the maximum you’re likely to have in the linked accounts, the amount of variable interest you’ll pay will be minimal.

Revolving credit mortgages

A revolving credit mortgage is like an all-in-one account with a large overdraft. You can borrow (withdraw) up to your agreed limit and make repayments whenever you choose. It means you’re not locked into regular mortgage repayments.

The revolving credit account can be accessed in the usual ways – EFTPOS, ATMs, internet banking and so on. The interest is calculated daily and added each month to the amount you owe. Just like an offsetting mortgage, money you are holding can be used to reduce the mortgage interest you pay. Revolving credit mortgages also have a variable (floating) interest rate, which is typically higher than fixed rates, so splitting your borrowing with a fixed interest rate mortgage can be a good idea.

With revolving credit mortgages, you have to be disciplined when it comes to managing money. It’s easy to keep borrowing up to your limit and never make a dent in your principal. And because everything is in the one big account, it’s not always easy to ensure you have enough to cover upcoming GST and income tax payments.

Using a mortgage broker

When reviewing their mortgage or making necessary changes, many people now work with a mortgage adviser (aka broker). A good broker will represent most of the main lenders and understand the latest lending rules and opportunities. Their experience can be a big help when it comes to recommending and explaining the best options for your situation. Brokers are paid by the lender you choose to go with, so there’s usually no extra cost to you for their services. To learn more, see our article ‘what does a mortgage broker do?’

If you’d to have a mortgage broker on your side, our free find-a-broker service makes it easy to connect with one of New Zealand’s best mortgage advisers.

DISCLAIMER: The information contained in this article is general in nature. While facts have been checked, the article does not constitute a financial advice service. The article is only intended to provide education about the New Zealand mortgages and home loans sector. Nothing in this article constitutes a recommendation that any strategy, loan type or mortgage-related service is suitable for any specific person. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making financial decisions, we highly recommend you seek professional advice from someone who is authorised to provide financial advice.

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