COMMENT:
Each week the NZ Herald's Cooking the Books podcast tackles a different money problem. Today, it's how to master your mortgage whether your finances are going well, or are under stress. Hosted by Frances Cook.
Despite the Kiwi obsession with owning their own home, there are still pros and cons to having a mortgage.
You are of course paying off an asset, and working towards a day when keeping a roof over your head costs very little.
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But it can also be a millstone around your neck. Get it wrong and you'll be in trouble with the bank, go backwards 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 your mortgage structure.
Changing a few settings can see you making progress faster without spending a single cent more.
Of course, if you're also able to put more on the mortgage, you'll pick up even more speed on achieving those goals.
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 put aside, you're in a good position to make a dent in your mortgage right now.
Interest rates are low, but there are still ways to push them even lower.
When you're tossing up between fixed and floating, you're choosing between flexibility versus cheaper debt.
A fixed interest rate means exactly that – you agree on the rate with your bank, you set it at that for a certain length of time, and you can't change it unless you pay a (hefty) fee.
To make up for that, fixed interest rates are usually the cheapest option.
A floating rate changes with the interest rate of the day, but the bonus is flexibility. You can make extra payments to your mortgage, to kill it off faster, without paying any fees.
On the latest Cooking the Books podcast, Enable Me's Hannah McQueen said if you want the flexibility of a floating rate, she would instead recommend a revolving mortgage.
"A reason that you would have a chunk of that mortgage on floating is so that you could pay off a chunk of that mortgage faster.
"But because it comes at a higher interest rate there is a point at which the cost will outweigh that benefit."
Meanwhile a revolving credit is like an overdraft, on a floating interest rate. It gives both flexibility, and certainty.
It means you can pay off extra on the mortgage, but if an emergency hits, you can take it back out again.
McQueen said that meant a revolving credit came with a warning – to make sure you only use the revolving part to pay off extra, or to keep for emergencies like losing your job.
If you're someone who has struggled with things like not overspending with your credit card, a revolving mortgage may not be for you.
"Don't have eftpos access to it," McQueen said.
"As you see the results, you engage more, you become sharper and leaner, and that's when that snowball effect happens."
Now, if you're one of the many people impacted by Covid-19 and in need of some breathing space, there are also ways to do that with your mortgage.
While there's a lot of talk about mortgage deferrals, if you defer entirely, your mortgage will still be growing in the background with the interest you're not paying just being added to the total.
Just like small extra payments can knock off years, a deferral of a few months could also add to your mortgage significantly.
There are other options to give yourself more space while having less of an impact on your future.
You can extend your mortgage term, spreading the repayments over a longer period of time. It means each payment will be smaller, and you could up the payments again when the job situation gets better.
If you go interest only, you'll have even smaller payments again. Your mortgage won't get any smaller, but at least you don't have the stress of knowing it's getting bigger.
"You can actually do interest only, and it doesn't break your mortgage" McQueen said.
"And if that's not going to give you what you need, I would first look to cut, cull, all other expenses, and adjust your lifestyle first before you go on a mortgage holiday."
A deferral is of course better than losing your house entirely, so if that's what you need to do, don't feel any shame in that.
Listen to the full interview in Cooking the Books podcast here, or the video above
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