Falling interest rates are turning many New Zealanders' minds to their mortgages, and are creating a big opportunity for people to pay off their home loans much faster.
The Reserve Bank has dropped the official cash rate to a record low 1 per cent, but two rate cuts since May — and expectations by economists of more to come — have made now an ideal time to attack your mortgage.
However, millions of borrowers have no idea what interest rate they are paying, when their mortgage rate last changed, or the best ways to get rid of their largest debt.
Home loan specialists say it can start with small steps.
RULE NUMBER ONE
It's simple. Just pay extra.
Any money paid off the loan principal now will forever be reducing the interest expense of the mortgage — meaning more principal is paid off in every future repayment.
Home loans executive expert John Symond told News.com.au anyone who could pay an extra $50, $80 or $120 every fortnight into their home loan would repay their mortgage many years earlier.
"If you're serious about it, pay your loan back as fast as you can."
Free online mortgage repayment calculators can help you crunch the numbers. For example, injecting $80 a fortnight extra saves $31,000 of interest and three-and-a-half years off a typical $350,000 mortgage.
KNOW YOUR RATE
The only way to work out you're paying too much for your mortgage is to understand what your interest rate is and what the competition offers.
Symond said lenders often changed their tactics, sometimes aggressively chasing new business with reduced fees and lower interest rates, but other times not.
"They take it in turns, but how do consumers know that?" he said. Seeking help from a mortgage adviser can help clarify what's happening.
"People think that long term their bank will look after them," Mr Symond said. This has not proved true, with the best interest rates often going to new customers.
The CEO of uno Home Loans, Anthony Justice, said it was vital to check the interest rate you were paying.
"Our research shows that over half of consumers don't know what rate they are on," he said.
"Ask your lender for a better deal — or ask your broker to do that for you. If they won't give you a better deal find out what the best alternative is and consider switching."
NO SILLY SPENDING
Justice said Uno's recent Household Financial Waste Report found that Australian households were wasting massive amounts a year on gym memberships alone.
Other wastage uncovered included $930 million of unused and unreturned clothing purchases, $621 million in unnecessary credit card interest and $332 million in unused gift cards.
The biggest contributor to household financial waste was unused food products, at $9.1 billion, Uno's report found.
Similar wastage trends are prevalent in the local market, with Kiwis often spending on unnecessary items.
"Be aware of what you might be wasting money on in your household budget that you could be putting towards mortgage repayments," Justice said.
Cutting out takeaway coffee and bringing lunch from home instead of buying it are often seen as the easiest spending cuts. Canstar's group executive of financial services, Steve Mickenbecker, said this was because those two expenses represented money squandered with no lasting impact.
"Once you put them down your throat, you don't feel much better off," he said. "These little indulgences make no difference after the event."
This was different to spending money on enjoyable experiences such as going out to dinner or to the footy. "People have to live as well," Mickenbecker said.
AVOID MONTHLY REPAYMENTS
Borrowers are often urged to make their payments fortnightly rather than monthly if they want to save money, but this causes some confusion.
The strategy only works if you divide a monthly repayment into two and pay that every fortnight, taking advantage of the fact that there are two-and-a-bit fortnights in each month.
"It's making that extra (fortnightly) repayment every year that makes a difference," Mickenbecker said.
New Canstar research has found that switching from monthly repayments to fortnightly or weekly repayments on a $300,000 mortgage could save a borrower $35,000 and wipe more than four years and three months off the length of their home loan.
Despite this, Canstar found that many borrowers still pay their mortgage monthly.
"Your bank normally asks for monthly mortgage repayments," Mickenbecker said.
OFFSET AND REDRAW
Mickenbecker recommended putting all surplus money into an offset account, where savings are used to reduce the loan principal until spent.
"Alternatively, put the surplus directly into a loan account that has a redraw facility," he said.
Symond said "everyone's saving for something", and whether it was a holiday, new car or other goal, the money should sit in a home loan account with a redraw facility.
"Why put it into a savings account and get 1 per cent interest when you can get 3-4 per cent interest savings on your home loan?" he said.
If using an offset account, make sure it's 100 per cent offset, because some may be 60 per cent or less.
HOME LOAN CHECK-UPS
"Having financial health checks at least once every year is important," Symond said.
He said refinancing with another lender to a cheaper rate might save money, and seeking expert advice was important because a 0.25 per cent savings might mean nothing if other costs were involved.
Mickenbecker, said switching to a competitor could cut a significant amount off your home loan.
"It means getting onto a lower rate home loan is going to save you a lot of money," he said.
He also recommends that even if you get a lower rate, you should keep paying at your current instalments because it will mean knocking years off your home loan.