When reviewing your mortgage, ask yourself:
· Are you still making repayments which are as big as you can comfortably afford?
· Would you become mortgage-free faster by changing the structure of your mortgage or switching lenders?
· Will you pay less interest in the long term by borrowing against your mortgage to pay for other items, or by consolidating other debts?
Mortgage payments
Boosting your repayments by an extra $50 per week can save you thousands of dollars of interest, and you’ll become mortgage free faster.
Doing a budget can help you work out whether you can afford to increase your repayments (visit www.sorted.org.nz for an easy Budget calculator). To work out how much you will save by lifting your repayments, use Sorted’s Quick Mortgage calculator
Changing the structure of your mortgage
Changing the structure of your mortgage, for example switching some or all of your mortgage to a cheaper fixed or floating rate, or switching to another lender, may save you thousands over time.
Before making the change, it’s important to check out the costs and possible savings carefully. Possible costs include early repayment fees if your mortgage is on a fixed interest rate, the application fee for a new lender and legal costs.
Add up the costs and potential savings, and work out how long it would take for the savings to cover the costs. If it would take a long time for the savings to outweigh the costs, be cautious.
And beware of telemarketing companies offering to restructure your loan. Often their offer sounds very attractive, but they may charge high fees. You can set up a similar mortgage at most of the big banks and some of the smaller lenders, or through a broker, for much less.
Borrowing against your mortgage to pay for other items
There are some occasions when using the flexibility and relatively lower interest charges of your mortgage to fund something other than a home can be worthwhile. For example, if you don’t have the cash to replace a major home appliance, such as your fridge, using your mortgage to pay for it will be better than paying a credit card interest rate of 19 percent.
Rather than borrow for non-essentials or things you can do without until, say, next year, it’s cheaper to save and pay cash. Borrowing against your mortgage to pay for luxuries like a boat or an overseas holiday will just make the cost of those things far higher. Whenever you consider using your mortgage like this, check the fees and interest rates to work out the real cost.
Debt Consolidation
If you have a number of loans that charge high interest rates – for example, a car loan at 15 percent or credit card debt at 19 percent – then it’s worth considering paying off these loans by increasing your mortgage. This is called debt consolidation. Ideally you should increase your mortgage repayments so you can still pay off your mortgage when you planned.
If you can’t manage
Sudden changes in circumstances, such as losing your job, can create significant financial strain. If you’re having trouble making ends meet, the first step is to make a budget to work out where you’re spending your money (use the Budget calculator at www.sorted.org.nz). Once you know exactly where your money is going, you can work out if you can realistically cut expenses to make ends meet.
If you think you’ll miss a mortgage payment, get in touch with your lender quickly. They can tell you what the options are. Perhaps you might just pay the interest on the loan for a few months until you’ve got your finances back on track.
Mortgage free at last
Once you’ve paid off your mortgage it’s time to set new financial goals and renew your financial plan – for example, buy an investment property, go on an overseas holiday or save for retirement. If you continue to save the same amount as you were paying into the mortgage, it’s likely you’ll achieve your goals rapidly.
If you think you may take out a loan in the near future, one option is to not “discharge” your mortgage with your lender – that will see the mortgage details taken off your land title. Leaving it on the title (with nothing owing) means you won’t have to pay to set up the legal documentation again.
For more information and tips about managing your mortgage, including easy to use mortgage calculators and checklists, visit the Retirement Commission’s independent website
www.sorted.org.nz .
