There are ways to add structure to mortgages that will allow you to minimize the interest you pay on your borrowing. These ways can be broken into two types:
Passive management: Passive management is utilizing your money and income to help reduce your interest cost.
Active management: Active management is increasing your repayments or making extra payments to your mortgage.
Both types of management will save you a lot of money however active, or extra repayments, are unlikely to be utilized all the time as different stages of life/circumstance will mean the ability to pay more will not be realistic. Passive management however should always be able to be utilized and if you are not currently passively managing your loan you are costing yourself.
The basis of passive management is utilising income before it is spent to reduce some of your interest cost. To illustrate this assume you are paid $5000 a month on the 1st of every month and your mortgage (and every other bill or expense) is paid on the 30th of the month. If you owe $320000 but offset your income against it then for all but one day of the month you will only be paying interest on $315000. This income savings can then be used the following month to give you a compounding effect that will save you tens, if not hundreds, of thousands of dollars over the life of your mortgage.
A strategy of both active and passively attacking your mortgage should be considered over a long period. The active management being in times of surplus while the comfort of the passive management meaning even when there is no surplus you are still getting ahead.
The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans.
