Consider dividing your loan into smaller pieces that can be fixed for different periods to take advantage of cheap rates and long-term security. Photo / Thinkstock
It's probably your biggest bill but too few people realise how much money they could save if they put some thought into managing their mortgage. Do you have the right interest rate, loan structure and term?
ASB's head of wealth advisory, Jonathan Beale, recommends not being too hung up on getting the lowest interest rate available.
Do you value the certainty of knowing what your payments will be? If so, you likely want to fix for a longer term.
If you think your circumstances could change a shorter-term rate might be better.
Keeping a portion floating is a good idea for those who receive commission or bonus payments because it enables them to pay off a lump sum any time.
Interest rates are low at present, from 5.59 per cent for a year and are likely to move up over the coming years, so it makes sense to fix at least part of your loan on a longer term.
Consider dividing your loan into smaller pieces that can be fixed for different periods to take advantage of cheap rates and long-term security.
When refixing your mortgage, don't fall into the trap of extending the term.
"Lots of people take out a 25-year mortgage then two years later the rate comes up for renewal and they take out another 25-year mortgage when they should be taking a 23-year mortgage and trying to reduce that. It makes a big difference to how much interest you pay over the life of the mortgage," Beale says.
If you're disciplined, you could consider a revolving credit facility.
This is like a big overdraft and means you use the money in your everyday transaction account to reduce the size of your loan.
It might work like this: You have $50,000 of your loan as a revolving credit account.
During the month, you put all your everyday purchases on your credit card. During the month, you have salaries of $6,000 credited to the transaction account.
At the end of the month, you withdraw the money from the transaction account to pay off the credit cards.
It means the $6,000 that was credited to your account during the month and sitting there until you paid off the credit card reduced your home loan and meant you weren't charged interest on it for that period.
Beale says: "The advantage is you're reducing the debt amount that they're working out the interest on but you've got to be very focused on, 'I'm using this to reduce my interest payment and reduce what I pay'."
Offset mortgages work in a similar way. Savings accounts are linked to the mortgage, reducing the total loan amount. The savings accounts won't earn any interest.
This is great if you know you're saving for something, such as your kids' university fees, but you worry you might not have the discipline to have the money sitting in a transaction account where it's accessible.
The money you put aside in a separate account can still be used to reduce the total you owe the bank.
In some cases, you can link the loan to other family members' accounts. If your parents
are willing to forego the interest on their $50,000 savings account, for example, you can reduce the amount of the loan you're paying interest on by $50,000.
However you structure it, paying more off your mortgage than you have to is one of the best financial decisions you can make.
David Boyle, group manager of investor education at the Commission for Financial Capability, says people should realise that extra payments can make a huge difference.
Any extra you pay will go directly on to the principle you owe, reducing the amount that is charged interest over the life of the loan.
"The longer you have debt, the power of compounding works against you.
If you pay a little extra fortnightly or monthly, the impact can be quite significant over the term of the loan."
The home loan market is competitive. If you think another bank is offering a
better rate ask your bank to match it.
Many banks also offer incentives such as cash and TVs to those who switch.
Take interest
• A $500,000 loan paid off at $1652 fortnightly on an interest rate of 6 per cent costs $359,119 in interest over 20 years.
• The same loan paid off at $2067 a fortnight is gone six years earlier and costs $232,585 in interest - a whopping $120,000 less.
Personal insurances such as life insurance, trauma and income protection, should be reviewed every year to ensure the type and amount of cover you have remains relevant.
Financial Services Council chief executive Peter Neilson says what might have been right five or 10 years ago might not be appropriate now. "It's worth doing a review when your assets or liabilities change."
That could be as simple as putting your details into an online comparison site to check the premium you are paying against those of competitors, or engaging an adviser to do a review.
Almost every insurer allows policyholders to increase life insurance cover without medical evidence in the cases of special events. These were usually restricted to events such as marriage and the birth of a child. Today they include buying a property, substantial increase in debt, increase in salary, civil union and a child starting tertiary education.
ASB's head of wealth advisory, Jonathan Beale, says not everyone needs life cover but it is worth considering other types of personal insurance.
"If someone is going to be put in a financial position if you're not around, you need life cover to pay off all your debt as a minimum. If you're working, you need to ensure your income is protected if you're sick."
Life cover pays out when you die. Income protection covers situations when you can't work in your normal job due to an illness or accident. Insurers cover a proportion of your income so you're not better off claiming on insurance than you are working.
In the case of an accident, income protection will top up your ACC cover if you earn more than the ACC limit and kicks in when ACC determines you can work but can't do your own job.
Trauma protection pays a one-off sum if you are diagnosed with illnesses such as cancer or suffer a heart attack. Total and permanent disability covers situations where you are permanently disabled and unable to work. It won't pay unless you can never go back to work.
Beale says people can make insurances more affordable by choosing a higher excess or longer wait periods before cover kicks in.
"If you self-insure a little bit, get some money in a savings account and use that rather than claim, you'll save on your premium."
Talk to an insurance adviser to help you get the right mix of cover for your circumstances.
Cover your bases
$500,000 life cover for a 30-year-old female non-smoker
• AIA - $32.76/month
• AMP - $24.56
• Asteron Life - $25.38
• Fidelity Life - $24.25
• Partners Life - $28.65
• Sovereign - $25.94
• OnePath - $26.74
• Countdown - $24.77
Handy tools
• Mortgagerates.co.nz - Check out the latest home loan rates
• Lifedirect.co.nz - Compare insurance premiums
• Fundfinder.sorted.org.nz - Make sure you are in the right KiwiSaver fund
• Sorted.org.nz/calculators - Find out how much of a difference paying more on your mortgage might make
• Heaps.co.nz - Manage your budget and set financial goals
• Spendee - Track where your money is going
• BillTracker - Keep on top of your bills.
You probably have a few of these in your wallet, and they can be a blessing or a curse, depending how you use them.
"Credit cards are great if you give them a damn good thrashing every month and make sure you pay them off the next month," says Boyle. "They're a great way to help with
budgeting and you don't have to carry cash. But if you're just paying the monthly minimum, it won't put you in a good position."
Credit card interest rates vary between 18-20 per cent a year, so it is more expensive to have credit card debt than it is to have a personal loan. Most banks require a minimum monthly payment of 3-5 per cent of the balance.
Depending when in a billing cycle you make a purchase, banks can give you 44-55 days interest-free. If you have credit card debt you're having trouble paying off, consider taking a balance transfer offer. Many banks offer deals such as 0 per cent interest for a certain period for balances transferred to their cards.
This can be a good way to get on top of a debt.
David Boyle, group manager of investor education at the Commission for Financial Capability, says: "Zero per cent for six months wouldn't be a bad thing. But what is that going to do to after that? You'd have to reduce the debt before the interest rate kicks in."
If you have a lot of credit card debt, 2015 could be the perfect time to cut them up and transfer the balance to a personal loan.
Effort pays off
If you are having trouble paying off your credit card balance, consider transferring it to get a cheaper rate.
Most major banks are offering no interest or low interest for between 6 months and a year on transferred balances.
ASB's Jonathan Beale says if you transfer banks, make sure you pay off the debt and don't just delay the inevitable. "Another option is to transfer it to a personal loan because it will have a lower rate."
It's a good idea if you can get a lower interest rate but the key is to make sure the term of the new loan isn't longer than the loans you've combined. A lower interest rate loan can still be more expensive than a high interest one if it takes longer to pay off.
That's why putting a small debt on to the mortgage isn't always a great idea.
"Putting money on a mortgage is probably pushing out the term so it looks cheaper on a monthly or fortnightly basis but actually you're paying an awful lot more interest than you'd pay on a shorter term," the ASB's Jonathan Beale says. "The quicker you pay off the debt, the better. It may be more painful on a monthly basis but if you're extending the term you're only extending the amount of interest you pay."
He says it's vital that people who consolidate their debt don't feel they can then rack up more.
"The key to getting out of debt is to curtail impulse spending. Shop around. Think 'do I need this?' Discipline about spending will help with the amount of debt. But goals should always be realistic. Don't say 'I'm going to pay off my debt in a year'. Be sensible about it.
Set a reasonable timeframe and stick to it."
Pay off your highest-interest debts first, then work your way down. If you can, pay your bills from your salary when it arrives in your bank account, rather than waiting until the end of the pay period to transfer across what's left.
Come together
If you had $5,000 in credit card debt, being charged 18 per cent, $2,000 in personal loans being charged 9 per cent and $3,000 in hire purchases being charged 20 per cent, you'd eventually pay it off in seven years and 10 months if you were paying the accounts off individually at $100 a month each. Consolidating the debt into one 15.95 per cent loan could save $2,000 in interest and see the debt paid off within four years, for the same monthly payment.
This week: Dealing with debt
Next week: Building a nest egg
ANZ stopped accepting deposits into others' accounts last year.