As mortgages have a life that lasts decades there are some strategies you can apply to them to pay them off significantly quicker. One that is often overlooked is using inflation to help pay them off faster.
We can typically expect inflation to impact both income and expenses. Mortgages, however, are a fixed amount, a $300,000 mortgage will not be $320,000 in 5 years’ time, it will be $300,000 less principal repayments.
So how can this be used to your benefit? This can be done by using the amount that the mortgage has not risen by inflation as an extra repayment.
The following table of monthly costs will help illustrate this:
|Year 1||Year 5||Year 10||Year 20|
|Income||$ 8,000||$ 8,659||$ 9,561||$ 11,654|
|Mortgage||$ 3,000||$ 3,000||$ 3,000||$ 3,000|
|Expenses||$ 5,000||$ 5,412||$ 5,975||$ 7,284|
|$ –||$ 247||$ 585||
As the table shows even if currently you spend every cent you earn in 5 years times you should have $247 a month left over, and 20 years time, $1370. Direct this income into your home loan and you will have significant results, taking almost 10 years off a 30 year mortgage term. Income, mortgage and expenses are all listed as monthly costs, then 2% inflation is applied to both income and expenses, with the table showing the calculations at 1, 5 ,10 and 20 year time points.
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.