How to Pay Off Your Mortgage Faster

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 5.00% p.a. and a 25-year term. Your required repayment is $2,923 per month. Over the term you'll pay $376,885 in interest costs. However, paying an extra $1,000 per month for the remaining mortgage term could mean you'd save around $162,900 on interest costs. These results assume the interest rate stays at 5.00% over the whole remaining mortgage term. Our mortgage overpayment calculator has more information.

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. And it's likely to be more than you think.

This 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:

1. When you make monthly payments, you make 12 payments a year. When you pay fortnightly, you make 26 payments per year, which turns out to 13 payments in a year.
2. With the extra payment, you reduce your balance by several thousands of dollars in interest over the life of a standard loan.

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:

• With monthly payments, you'll pay $2,371 with a total interest cost of $211,317 The average interest each month is $704.39
• With fortnightly payments, you'll pay $1,185, with a total interest cost of $184,489. The average interest each fortnight is $319.18
• The total savings are around $26,000 over the 25-year term (assuming the interest rate is fixed at 3%. The higher the interest rate, the more you save by choosing fortnightly payments).

Normally 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.

If 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. 

Work 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.

It’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 5% p.a, you can easily pay $500+ over the life of the mortgage.

New 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.

It’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.

If 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. 

High 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.

"Some friends of mine asked me to help them organise their mortgage. I directed them to a trusted broker, and they progressed to a meeting. I sat in on the meetings - the mortgage broker explained that a loan with a fee-free overpayment allowance would be best, coupled with a low fixed interest rate.

This structure was favourable and cost-effective. My friends made 10% 'of the balance owing' over-payments each year without penalty and paid 1.50% of any overpayments above this. Because of their relatively high incomes, they have reduced their mortgage from $800,000 to around $300,000 over four years. To do this, they needed a mortgage that anticipated their incomes. I believe that everyone needs to get the 'right' mortgage.

Getting a mortgage 'wrong' is difficult; lenders must offer what is affordable. That being said, this guide is designed to help you save as much as possible. Whatever you decide to do, I wish you the best of luck".