Cooking the Books Podcast: How to Save Thousands of Dollars on Your Mortgage, Through the Good Times and the Bad

COMMENTARY:

Each week, the NZ Herald’s Cooking the Books podcast tackles a different money problem. Today, it’s how you master your mortgage, whether your finances are doing well or you’re under stress. Presented by Frances Cook.

Despite New Zealanders’ obsession with owning their own home, there are still pros and cons to having a mortgage.

Of course, you are paying for an asset and working your way to a day where keeping a roof over your head costs very little.

But it can also be a millstone around your neck. Get it wrong and you will be in trouble with the bank, back down financially, and have a black mark on your record.

The key to getting more of the good parts and less of the bad often comes down to the structure of your mortgage.

Changing a few settings can make you move faster without spending a single penny more.

Of course, if you can also put more into the mortgage, it will accelerate your achievement of those goals even more.

Let’s start with how to make the most of a good situation.

If your job is still stable and you have some emergency savings set aside, you’re in a good position to take a toll on your mortgage right now.

Interest rates are low, but there are still ways to lower them further.

When you are switching between fixed and floating, you are choosing between flexibility versus cheaper debt.

A fixed interest rate means exactly that: you agree on the rate with your bank, set it for a certain period of time, and you can’t change it unless you pay a (hefty) fee.

To compensate for that, fixed interest rates are often the cheapest option.

A floating rate changes with the interest rate of the day, but the advantage is flexibility. You can make additional payments on your mortgage, to pay it off faster, without paying any fees.

On the latest Cooking the Books podcast, Enable Me’s Hannah McQueen said that if you want the flexibility of a floating rate, she would recommend a revolving mortgage instead.

“One reason you would have a portion of that floating mortgage is so you can pay off a portion of that mortgage faster.

“But because it is a higher interest rate, there is a point where the cost will exceed that benefit.”

Meanwhile, a revolving loan is like an overdraft, with a variable interest rate. It gives both flexibility and certainty.

It means that you can pay an additional amount on the mortgage, but if an emergency happens, you can withdraw it again.

McQueen said that meant a revolving loan came with a caveat: to make sure you only use the revolving portion to pay an extra amount or to keep it for emergencies like losing your job.

If you are someone who has struggled with things like not overspending on your credit card, a revolving mortgage may not be for you.

“I don’t have effective access to him,” McQueen said.

“As you see the results, you get more involved, it gets sharper and thinner, and that’s when that snowball effect happens.”

Now, if you are one of the many people affected by Covid-19 and need a break, there are ways to do it with your mortgage, too.

While there is a lot of talk about mortgage deferrals, if you fully defer them, your mortgage will continue to grow in the background and the interest you are not paying will simply add to the total.

Just as small additional payments can reduce years, a delay of a few months could also significantly increase your mortgage.

There are other options to have more space and have less impact on your future.

You can extend the term of your mortgage by spreading the repayments over a longer period of time. It means that each payment will be less and you could increase the payments again when the work situation improves.

If you only pay interest, you will have even smaller payments again. Your mortgage won’t go down, but at least you won’t have the stress of knowing it’s going up.

“You can actually only pay interest and you don’t break your mortgage,” McQueen said.

“And if that is not going to give you what you need, you would first look to cut, cut, all other expenses and adjust your lifestyle before going on a mortgage vacation.”

A postponement is, of course, better than losing your home entirely, so if that’s what you need to do, don’t feel any shame about it.

• Hear the full interview on the Cooking the Books podcast. You can find new episodes in the Herald or subscribe to iHeartRadio, Apple’s podcasting app or Spotify, or wherever you get your podcasts.

• If you have a question about this podcast, or a question you’d like to answer in the next one, come and tell me about it. I’m on Facebook here, Instagram here and Twitter here.