Paying off your mortgage faster when interest rates are rising

Looking for ways to pay off your mortgage as quickly as you can?

Data shows that nearly half of all home loan borrowers are ahead on their payments. That means they are on track to pay off the debt more quickly, saving significantly on interest costs, or are building up a good buffer in case something happens that means they need to slow the repayment pace in future.

While paying off your home loan quickly is an easier feat when interest rates are low, it’s even more effective of a strategy when rates are rising. Here’s what you need to know.

Why it works

When you pay extra off your home loan, you save yourself money in the future. That’s because every extra dollar you remove from your total amount owing is no longer accumulating interest.

When interest rates are rising, that becomes an even more powerful thing. If mortgage interest rates are at 6%, paying off your home loan gives you an equivalent return to an investment offering 6% after fees and tax. Depending on your goals, that can make it a really attractive option compared to other potential uses of your money. And getting rid of your loan as quickly as you can also reduces your exposure to future interest rate rises.

Increase your payments

Increasing your payments, even a little bit, can make a huge difference to the overall cost of your home loan, especially in a higher interest rate environment.

Take, for example, a $500,000 loan over 25 years.

At a 6% interest rate, you pay $1,486 a fortnight to clear the debt in this time, and pay $465,893 in interest over the life of the loan. If you increase your fortnightly payment to $1500, you’ll reduce your total interest to $454,218. At $1700 a fortnight, you will clear your loan six years earlier and pay $337,437 in interest.

Pay a lump sum

New Zealanders have put more money aside in savings accounts over the course of the pandemic. If you’re someone who’s built up a sum in the bank, you might consider using it to reduce the amount owing on your home loan.

Some people have also built up a significant amount in share trading platforms. Depending on your investment plans, it may make sense to consider using some of that to reduce your debt.

If you have a $500,000 loan, with a 6% interest rate, over 25 years, and pay off a $10,000 lump sum after three years, you’ll save 11 months on your mortgage and $26,360. If your loan is floating, you can make extra payments without penalties, and most lenders allow people to pay off a certain amount of a fixed loan, up to a set limit, without a fee.

Pay fortnightly

A really simple way to get some extra money paid off your home loan is to change the frequency of your payments. If you currently pay monthly, divide the amount in half and pay this fortnightly, instead. It means you’ll make two extra payments a year – or the equivalent of an extra month. It all helps! You will need to set the fortnightly amount at half the previous monthly repayment to make it work.