Owning your own home is the great New Zealand dream, but the amount of interest you pay to achieve that dream can be a nightmare!
Traditional Bank mortgages are structured in such a way that in the first 15 years of a 25-year mortgage very little capital is paid off the principal of the loan.
For example, if you pay an average of 8.0% in Home Loan interest on a $100,000 loan taken over 25 years, your total payments will amount to $231,700. This is 2.3 times the original capital borrowed. This makes very little sense and demands consideration of the alternative finance options.
Where other loans exist, including credit cards or personal loans, the interest rates are often much higher and cut more deeply into your savings capacity. This is why debt management is so important in a financial strategy.
There are currently three main options for the early repayment of a mortgage: –
1. A cash lump sum may be used to partially or totally repay the debt. If this option is chosen, in most existing cases the availability of the cash is lost.
2. By increasing the level or frequency of the required repayment the principal is reduced at an increased rate, hence extinguishing the mortgage faster. Again, in most cases access to this repayment is lost and an additional burden is placed on your standard of living.
3. The interest generated by investing funds in an “offset” account is offset against the interest payable on the mortgage.
Each option has its benefits, however, the underlying factor is that you need to outlay more money and for this you gain no flexibility or control.