A Home Loan — Let's Get Rid Of It
If purchasing a home isn’t on your horizon just yet, still have a quick read. You never know when a conversation about mortgages may come up at the dinner table — let’s encourage talking about money, it shouldn't be a feared! You didn’t hear it here first, Jim Rohn, motivational speaker, said formal education will make you a living; self-education will make you a fortune.
If you’re unsure what a mortgage is, the word is derived from french law, translating to death pledge — sounds scary right? This post will cover the basics of how a mortgage works, and ways to pay off your mortgage quicker.
Let’s be honest, we want to get rid of this new debt as fast as possible. In saying that, this post is referring to the home you live in — if you have a investment property with debt, then we have an entirely different scenario — keep an eye out for this post down the track.
To get a mortgage you need to have purchased a home! Normally the calculation would go: purchase price, minus your deposit (see what makes up a deposit here) equals your mortgage amount.
There are then two components to a mortgage:
- Principal: Amount of money borrowed, not including interest, to purchase the home
- Interest: Percent charged for the use of borrowed money — today’s 12 month interest rate is 4.25% (17/04/2018 as per www.anz.co.nz for lending under 80% LVR)
You then make your repayments weekly, fortnightly or monthly, which reduce the principal (the initial borrowed amount) and then paying the interest (the cost to borrow the principal amount)
Mortgages are usually given over 30 years and if you make the minimum repayments each pay then you’ll be debt free in 30 years — seems like a long time? Let’s find out the ways to get rid of your mortgage quicker!
Loan Structure is key; loans with offset facilities allow you to have your salary paid directly into the offset account which reduces the interest you pay on your home loan — further explanation here !
Make extra repayments: if your loan is fixed, most banks won’t tell you that you are actually able to repay an additional 5% per year on top of your standard repayments.
Pay your mortgage weekly, instead fortnightly and definitely instead of monthly — there are more repayments per year this way.
When the interest rate falls, don’t lower your repayments, keep these up so your principal amount reduces further.
Talking about your interest rate, have a look around and see what other banks are offering, nine times out of ten your bank will be able to match it.
Have you got other debt, such as credit cards, personal loans and car loans? Consolidate these debt’s into your mortgage so you have the lowest interest rate.
If you get a pay rise give a gift to your future self and increase your loan repayments!
Tax refunds and bonuses — It’s that time of year! Pro tip, put this extra money into your mortgage!
Have a spare room to two? Get a flatmate or look into Airbnb!
Lastly, be a conscious spender. When purchasing a home your priorities change. Instead of purchasing a new coat each winter, you’ll be faced with your quarterly rates and insurances bill — trust me, it feels like they all hit at once!
If you have recently purchased a home and you’re feeling slightly overwhelmed with your new list of expenses, I’d suggest redoing your spending template — This will give you a better idea of your upcoming bills and if you do have enough moolah to splurge this winter. See the link here or take a look on my resources page.
If you do have any questions about loan structure or the best way to manage your money, feel free to get in touch via my contact page