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Making extra payments on your home loan

How to do it, is it worthwhile? Does it cost?

The question of making extra payments on your Home Loan is one that I don't get nearly enough.  You can make huge gains in the time it takes to pay off your mortgage by contributing some surplus funds to your mortgage every now and then.  

Most people are focused on getting the best interest rate or cash back when they're getting a mortgage and yes we can make sure you get the best deal there.  But the real advantage of having a Mortgage Broker on your side is the specialist advice in getting the best loan structure so that you can reduce your mortgage faster.  So let's have a look at the two main tools for paying your mortgage off faster...

The right structure

This is the best way to make extra payments on your loan.  The bank will normally just offer you a home loan over a 30 year term to give you minimum repayments.  The first thing you should do is look at your budget to see whether you could afford a little more.  For example the repayments on a 30 year mortgage @ 6% interest are $277/wk.  But if you paid an extra $20/wk you would take 5 years off the term, or for a further $30/wk you could have the term down to just 20 years!

Check out some repayment options for your loan by using our loan calculator, click this link or the "calculator" tab on the top right of this page.

Another way to make the best use of your loan structure is to have the majority of your loan on a fixed rate with a fixed repayment and to have a small amount on floating or revolving credit.  This means that you pay your standard each week but if you do some over time, get a bonus or just have a week with less spending then you can pay a lump sum on to your mortgage simply by transferring online.  No penalties or early repayment fees.  

The revolving credit has an added benefit of you being able to put funds in and take them out.  This can be helpful to reduce your interest cost by offsetting your savings or money you're keeping aside for tax payments etc.  There are downsides to this structure though and it is not for everyone.  I'll cover this in another blog later in the year.

Making extra payments

As mentioned above you can give yourself a structure which allows you to make lump sum payments without penalty.  However if you've just got a fixed loan then there are restrictions on making extra payments.

Every bank has a different policy on making extra payments and they all calculate the fees for making these payments differently.  These can also vary depending on your relationship with the bank and how long you've got to go on your fixed rate.  Always feel free to contact us if you're looking to make an extra payment as we may be able to negotiate a discount in the fee or provide you with a better alternative.

Sometimes you may be best to just increase your regular payments and sometimes it is better to pay a lump sum.  For example with some lenders you can increase your regular payments by up to a month and pay no penalty at all, but with others that may cost.  Some lenders will also let you pay 5% extra in any 12 months without paying a penalty.  However with some lenders you have to make a minimum lump sum payment of $10,000.  We can advise on what your lender allows and advise the best course of action.

If you're paying a large lump sum there is generally an admin fee ($100-$300) and there can also be a "Early Repayment Adjustment" amount.  This is generally only required if the fixed rate you are on is higher than the current advertised interest rate for the time you have remaining on that fixed term.  We can request a quote for you before you pay to make sure you know what's going to be best.

However, they key thing to remember is that you're almost always better off to repay money from your loan, even if it does cost you a small fee.  Remember the difference between the money you are receiving on your savings and what you're paying on your home loan is generally around 3%... that can add up over time so it's often best to reduce your loan balance if you can.

The above information should act as a guideline for ways you can reduce your Home Loan faster but it is always best to get specialist advice from us on what is the best fit for your personal situation.  The key things to remember are...

  • Have the correct loan structure for your budget 
  • Always pay a little extra if you can
  • If you receive regular bonuses then a floating portion is good
  • Always check with us before making a lump sum payment 
  • You're almost always better off to pay off as much of your loan as you can!

We hope you found the above information helpful.  We're always pleased to help our clients or discuss this with anyone you may know who is looking for mortgage advice for a new or existing home loan.

Talk soon

Adam Thompson
Mortgage Broker / Mortgage Adviser
My Mortgage

Cambridge, Matamata, Te Awamutu, Hamilton, Auckland


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