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Your mortgage rate is 8%

Repeat after me.
“The interest rate I pay on my mortgage is 8%…”
“The interest rate I pay on my mortgage is 8%…”

No it’s not

You’re right, it probably isn’t.  If you’ve refixed your mortgage at any time in the past 5 years, your mortgage is likely under 6%.  But here’s the thing.  You should be aiming to pay your mortgage as though it was 8% because at some point your mortgage will be there again.

Let’s look at an example of a couple with a $400,000 mortgage that is fixed for a year at 4.2%. Payments are around $470 per week and that’s comfortable for them.  But we don’t know what the future holds and so we need to plan for interest rates to go up.  So if we pretend the mortgage is at 8% we can set the payments at $691 per week.  This has a couple of benefits:

  • if, in the future, interest rates increase to 8%, there is no price shock.  You are used to paying these higher rates and continue on as normal
  • in the meantime, you are paying down your mortgage very quickly.  In fact, if you continue to overpay by $221 per week, your mortgage will drop from 30 years to just under 16 years and you will save a whopping $158,000 in interest.

The key is to get used to higher payments.  At some point in the future, interest rates will rise and you will be well positioned to cope with it.

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How do I get my mortgage interest rate to 8%?

I know increasing your payments on a mortgage seems unachievable but the good news is, you don't have to do it today.  You just have to aim to have them there in the future.  Here are a few steps that may help you transition to the 8% mortgage.

Step 1

Using our mortgage calculator, calculate what your mortgage payments will be at 8%.  That's now your goal.

Step 2

Every time you get a pay rise or cancel an expense payment, increase your mortgage payment.  If you got an increase (after tax) of $40 per week in your pay, increase your mortgage payment by $40.  Did you just cancel your cable TV and get a cheaper streaming channel? Use the savings to increase your mortgage payment.  Did you just pay off a Hire Purchase or Car Loan?  Those payments can now go onto your mortgage.

You will be surprised how often we receive these little increases but use them to buy unnecessary things.  Smashed avocado is getting most of the blame these days!

Step 3

Make sure your mortgage is setup correctly to allow you to pay extra money without being penalised.  We could write a book on correct mortgage structure (it would be a very boring book!) but for this purpose, you will probably want to use a Revolving Credit account so you can put extra money in without incurring a break fee.  Make sure you don't have an eftpos card attached to this account, otherwise you will just spend the money.  The goal here is to overpay the mortgage remember!

Summary

Make it a goal for this year to get your mortgage payments up to an 8% mortgage.  It's ok if you can't do that now.  Make it a goal for the near future.  Investigate what you could remove from your expenses to increase your payments.  You may like to check out our blog on the amazing budgeting Pocketsmith app or go to Pocketsmith.com.  (Note, we don't receive any compensation from Pocketsmith, we just really, really love it and it's NZ friendly!).

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