I’m about to disclose the golden secret to knocking years off your mortgage. This piece of literary genius could be the answer to your hopes and dreams!!
Actually it’s no big secret and anyone can do it so read on carefully and take notes if you need to.
When you first take out a mortgage it’s usually of the principal and interest variety. You’ve gone into the bank and sat down with one of their staff and signed up to a 25 year commitment as well as insurances and maybe Kiwisaver.
Principal and Interest mortgages are where the banks make their money. As the client you pay the greater part of the interest on your new mortgage up front.
Here’s a hypothetical example; Your fortnightly mortgage payment is $1,000.00. This would be made up of a principal reduction of $50.00 and the interest portion of $950.00. For the first few years your principal reduces very slowly and it’s only in the latter half of the mortgage term that you start to see some good gains on your principal.
What this means is you are paying the greater percentage of your interest back in the first half of your mortgage. Increasing your payments above the minimum requirements will help but there is a better way. It all comes down to principal reductions, thus reducing your interest costs.
To achieve principal reductions you’ll need 4 things;
1. A good mortgage structure. A smaller portion of your mortgage needs to be on a floating rate so you can make payments to reduce principal.
2. The desire and willingness to pay your mortgage off faster. This means being disciplined with your money. No random spending on big ticket items. It sounds easy but in reality for a lot of people it’s easier said than done. If your spending is under control then you’ll see the benefits.
3. A credit card. Now I know this sounds a little bit contradictory but let me explain. A credit card gives you 55 days of interest free credit up to a certain limit, so if you put all your day to day expenses such as groceries, petrol, any direct debits and automatic payments on your card, this enables you to leave your income sitting on the floating portion of your mortgage, keeping the principal on the mortgage lower which in turn incurs less interest. Then you pay your credit card off in one hit at the end of the month, using the funds you have sitting in your mortgage. Remember the credit card is interest free providing you have paid it off.
4. The final ingredient in getting that mortgage paid off sooner is an outstanding mortgage broker to do all the hard work for you at no cost.
So there you have it. No big secret really, just a good structure and a bit of common sense. Best of luck with your mortgage and should you need some friendly advice just give me a call.