How to Pay Off Your Mortgage Faster
Our guide explains must-know steps to own your home outright faster, avoiding the standard 25 or 30 years and all the interest costs that goes with it
Updated 26 October 2020
Signing on the dotted line, promising to pay your mortgage for 25 or 30 years can seem like a life sentence. Every fortnight or month, thousands of dollars are taken from your bank account to pay the interest and principal repayments. Most homeowners want to do whatever they can to pay off their mortgage earlier, but don’t know where to start and what they're allowed to do.
Know this first: With interest rates at record lows, you may be debating whether or not to break an existing mortgage deal and switch to a better 1-year, 2-year or even 5-year plan. Our view is simple - lenders charge a break fee, which only adds to your costs and decreases the overall savings. If you can wait until your contract term is up, and then re-mortgage, that’s often the ideal process. Until then, there are many other ways you can pay your mortgage off faster without incurring the cost of break fees.
Below we’ve outlined ten proven ways to pay your mortgage off faster so you can enjoy financial freedom.
Our view: The key to paying your mortgage down faster is consistency. In essence, you'll have the best results if you pick a method and stick with it. If that means you pay an extra $200 a month toward your mortgage or you refinance and pay the higher payment – don’t do it once, do it every fortnight. The more consistent you are with your efforts, the more time you’ll cut off your mortgage.
Know this first: With interest rates at record lows, you may be debating whether or not to break an existing mortgage deal and switch to a better 1-year, 2-year or even 5-year plan. Our view is simple - lenders charge a break fee, which only adds to your costs and decreases the overall savings. If you can wait until your contract term is up, and then re-mortgage, that’s often the ideal process. Until then, there are many other ways you can pay your mortgage off faster without incurring the cost of break fees.
Below we’ve outlined ten proven ways to pay your mortgage off faster so you can enjoy financial freedom.
Our view: The key to paying your mortgage down faster is consistency. In essence, you'll have the best results if you pick a method and stick with it. If that means you pay an extra $200 a month toward your mortgage or you refinance and pay the higher payment – don’t do it once, do it every fortnight. The more consistent you are with your efforts, the more time you’ll cut off your mortgage.
10 PROVEN Tips for Paying Your Mortgage off Faster
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Make higher repayment amounts (without triggering the early repayment penalty threshold)Your mortgage has a required payment. You have to pay that amount, but did you know you can pay more too? Banks such as the ASB permit you to increase your fixed interest rate loan repayments by up to $500 per fortnight or $1,000 per month without incurring an 'Early Repayment Adjustment (ERA)'.
Let’s take for example. If you have a $500,000 mortgage at 3.00% p.a. and a 25-year term. Your required repayment is $2,371 per month. Over the term you'll pay $211,317 in interest costs. However, paying an extra $1,000 per month for the remaining mortgage term could mean you'd save $85,794 in interest. These results assume the interest rate stays at 3.00% over the whole remaining mortgage term. To save the most, start making additional payments as early as possible in the mortgage term. The faster you pay your principal down, the more interest you’ll save over the loan’s term. It is never to too late to make extra payments, but doing it early on has the greatest effect. How much can I save? Our Mortgage Overpayment Calculator shows you in seconds. The graphic below, based on the example above, also illustrates that an extra $1,000 a month will reduce the mortgage term from 25 years to 15 years: 
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Make payments fortnightlyThis single decision will make a huge difference to the total interest you pay over the life of a mortgage. With this method, you technically don’t pay anything extra – you just change when you make your payments. Rather than making monthly payments, make them fortnightly.
Here’s how it helps:
How much can I save? In our standard example, if you have a $500,000 mortgage balance owed and a 3% p.a. interest rate:
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Pay your first payment on settlement dayNormally you don’t owe your first payment until the month after your closing. If you make a payment right away on the settlement date, though, you reduce the principal immediately, which means starting your loan off with less interest accrued. It’s a great start that may motivate you to keep the ball rolling – ensuring that you make extra payments each month.
How much can I save? If your first repayment is $2,000, not paying interest on that amount for 25 years will add up to over $1,000, so it's a great saving to make on day one. |
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Re-mortgage your loan, but don’t change your repayment amountsIf you’re nearing the end of your loan’s term and interest rates have dropped, the best idea is to switch to the lowest mortgage rates. You’ll secure a lower interest rate and save money overall.
Important: When you switch deals, don’t change your repayment amount. For example, if your original mortgage payment was $1,500 a month, and when you refinance, your new loan payment was only $1,200. Rather than paying only $1,200, keep the $1,500 payment. Now you automatically pay an extra $300 a month toward the principal, saving you on interest and shaving years off the loan. How much can I save? Lots. If your mortgage balance goes from $500,000 to $450,000 after two years, repaying as if your balance was $500,000 would save you $15,000+ over the remaining 20-23 years of a mortgage. |
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Pay all windfalls toward your mortgageWork bonuses, pay raises, and cash gifts are, arguably, best allocated to your mortgage. If you're able to separate these costs and put them into a savings account, you can pay down your principal balance when you re-mortgage. This will automatically reduce the interest you'll pay on the balance for the rest of the term.
How much can I save? Feeding in cash when you re-mortgage saves you thousands of dollars in interest costs. You may be tempted to use the money for one-off purchases, but even low interest rates create large interest costs over the life of a mortgage. And being mortgage-free gives you the greatest freedom. |
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Don’t add loan fees to your loanIt’s easy to say ‘wrap the fees into my loan’, but this costs you in the long-term. While it's easier to avoid paying any mortgage fees upfront, but those fees cost you a lot more than you realise because they accrue interest from day one.
How much can I save? If your lender charges $1,000 in fees, and your interest rate is 3% p.a, you can easily pay $500+ over the life of the mortgage. |
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Consider a floating mortgage, or part floating and part fixedNew Zealanders are increasingly taking out 'hybrid' mortgages, also known as split mortgages. The ASB is one bank which offers the ability to mix the benefits of a fixed interest rate, floating/variable interest rate and revolving credit home loan. The benefits can be significant - there's no penalty to early repay the floating/variable rate portion of your mortgage, and you can blend the current market interest rate with a fixed offer. This Stuff.co.nz article explains the pros and cons, and considerations to make.
How much can I save? It depends on what interest rates you borrow at, and the amount of extra repayments you make. However, for most people, a split mortgage offers flexibility and lets you benefit if interest rates continue to drop. |
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Cut random costs and pay your mortgage down insteadIt’s not fun to think about sacrificing, but if it can save you thousands of dollars in interest costs, there's a strong argument it may be worth it. Our guide to 20+ ways to save on household bills looks at helpful ways to cut costs and focus on repaying your mortgage faster. Every time you pay the principal down faster, you save yourself thousands of dollars in interest.
How much can I save? It depends on how much you can save - changing insurances, what interest rates you borrow at, and the number of extra repayments you make. However, for most people, a split mortgage offers flexibility and lets you benefit if interest rates continue to drop. |
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Choose a loan with portabilityIf you think you'll be moving before the end of the fixed mortgage term, choose a home loan that will be portable. This saves you on exit, early repayment and new mortgage arrangement fees when you pay off one mortgage and start another. The thousands of dollars the fees cost you can be better spent on paying the mortgage down faster.
How much can I save? If you plan to move, there's no point in overpaying upfront with an inflexible mortgage. We estimate the savings by seeking a portable mortgage will be at least $1,000. |
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Pay off personal (and high-interest) debt as a priortyHigh interest loans, credit cards and store cards affect your ability to overpay your mortgage. If you have $10,000 of personal debts, it's likely they cost you around $2,000 a year in interest repayments. That amount of money is best put into your mortgage overpayments, so the best approach is to prioritise personal debt repayment. This frees you up to focus on your mortgage, rather than dragging debts alongside your mortgage. Balance transfer credit cards are a good start, as you can move high-interest debt to 0% p.a. while you repay it.
How much can I save? If you make an effort to repay personal debt and cut back on credit cards, you could easily save $1,000 a year in high interest costs and re-direct it to your mortgage and pay off the entire balance faster and reduce mortgage interest costs. |
Concluding Comments and Using a Trusted Mortgage Broker
Mortgage brokers have a number of skills besides getting the best mortgage rates - they can structure your mortgage based on your personal financial situation and plans. If you plan to overpay, then a mortgage deal which lets you do this (up to a limit) is worth considering. Interest payments are the only costs of having a mortgage - reducing them as much as possible should be your number one priority.
MoneyHub.co.nz Christopher Walsh shares his experience:
"Some friends asked me to help them organise their mortgage. I sat in on the meetings with a mortgage broker and conveyed that a loan with a fee-free overpayment allowance would be best, coupled with a low fixed interest rate. My friends were able to make 10% 'of the balance owing' over-payments each year without penalty, and pay 1.50% of any overpayments above this. In four years they have reduced their mortgage from $800,000 to around $300,000 - it started with the right mortgage".
MoneyHub.co.nz Christopher Walsh shares his experience:
"Some friends asked me to help them organise their mortgage. I sat in on the meetings with a mortgage broker and conveyed that a loan with a fee-free overpayment allowance would be best, coupled with a low fixed interest rate. My friends were able to make 10% 'of the balance owing' over-payments each year without penalty, and pay 1.50% of any overpayments above this. In four years they have reduced their mortgage from $800,000 to around $300,000 - it started with the right mortgage".
