How to Pay Off Your Mortgage Faster

Why extra payments work so well

In the early years most of each repayment is interest. Any extra dollar goes entirely to principal, and that dollar stops accruing interest for the rest of the loan. As an illustration, on a $500,000 loan over 30 years, an extra $100 a fortnight from the start takes about five years off the term at interest rates between 5% and 7%. Try your own numbers in the extra repayment calculator.

Seven things that work

1. Keep repayments up when rates fall. When you refix lower, the bank offers the new minimum payment. Decline it and keep paying the old amount. It costs you nothing you weren't already paying.
2. Increase repayments with each pay rise. Even a third of the increase.
3. Pay fortnightly at half the monthly amount. You make 26 half-payments a year, which adds up to 13 months' worth. The gain comes from the extra month, not the frequency.
4. Shorten the term at refix. Ask for 20 years in place of 25. Repayments rise, and you've committed to the faster path.
5. Put lump sums in. Bonuses, tax refunds, an inheritance. Time them for when a fixed term ends, or use the floating portion.
6. Use an offset or revolving credit facility. Savings and pay sit against the loan and reduce interest daily. See offset and revolving credit.
7. Review the rate at every refix. A lower rate with the same repayment goes straight to principal.

What a fixed rate lets you do

This is where people come unstuck. During a fixed term, lenders limit extra repayments. Most allow something without a fee: a small percentage of the loan each year, or a modest increase in regular repayments. Beyond that allowance, an early repayment charge may apply. Limits differ between lenders, so ask yours before paying a lump sum.

The workaround is structure. Keep a slice of the loan floating or in a revolving credit facility, sized to what you expect to repay over the next year or two. Extra money goes there, penalty-free. Our structuring guide goes into it.

Should you pay the mortgage or invest?

It's a fair question. Paying off the mortgage gives a guaranteed, tax-free return equal to your interest rate. Investing may beat that, with risk, and the returns are taxed. KiwiSaver contributions that attract an employer match are hard to pass up. Beyond that it comes down to your rate, your tax bracket and how you sleep. This is general information. A financial adviser who covers investments can look at your whole picture.

What not to do

• Don't pay extra on the mortgage while carrying credit card or car debt at a much higher rate. Clear that first.
• Don't empty your emergency fund. An offset account lets the same money do both jobs.
• Don't stretch so far that one surprise bill sends you to a credit card.

This article explains how New Zealand lenders generally assess these situations. It is general information, not personalised financial advice, and lender policy changes often — check your own position with a registered adviser. Official sources: Reserve Bank of New Zealand for lending policy and the OCR, and Sorted.org.nz for independent government-backed money guidance.