Want to Wipe Out that Mortgage Quicker?

When you take out a home loan for the first time you are most likely going to sign up for a 30 year mortgage term. This is mainly because you are pumping all of your available funds into the deposit, so you take out the maximum term available on a mortgage which minimises your loan repayments.

But do you really want to be paying off that mortgage for the next 30 years? If the answer is no, then there is something you can do about it - and it all comes down to how you structure your mortgage.

So in this week’s update we will explore the concept of the Pay Down Cycle Method to help you wipe out that mortgage in no time!

How Does The Pay Down Cycle Method Work?

The Pay Down Cycle Method is an effective way to accelerate the repayment of your mortgage. It involves strategically structuring your home loan to reduce interest costs and pay off the loan more quickly. Here's a breakdown of how it works:

Let’s say your home loan is $530,000. We split the loan and take $500,000 and fix it for 12 months, then set up the remaining $30,000 as a Flexible Home Loan.

The goal is to “pay down” the $30,000 within 12 months before the fixed rate comes up for renewal on the big mortgage.

Sounds simple right. So how do you do it?

The focus is on the $30,000 Flexi Home Loan. The aim is to keep the outstanding balance on your Flexi Home Loan as low as possible to minimise interest costs. You achieve this by having your income credited to your Flexi Home Loan account and managing your budget very carefully. 

You make your everyday purchases using your credit card and set up a direct debit to pay the credit card off in full each month (so you don’t get charged interest on the credit card). Note: credit card interest rates are higher than home loan interest rates. So this only works if you avoid being charged interest on your card by not making any cash withdrawals and paying the balance off in full when it's due.

By managing this carefully over the year, you can achieve your goal of paying down your Flexi Home Loan, so you end up having $30,000 available to redraw. This is great timing because your $500,000 fixed home loan is now due for review, so we will take the $30,000 and make a lump sum payment onto it before re-fixing. Now your fixed rate loan balance is $470,000 and you’ll start the pay down cycle again - Rinse & Repeat!

The beauty of this method is that you can pay lump sums off quickly which will reduce your overall loan balance and therefore the interest costs. You also have full access to the funds in your Flexi Home Loan facility “just in case” you need it.

This option is best arranged with your Mortgage Adviser as you will need to carefully determine how much extra you can save over the course of 12 months to make it work. You may need to extend this out depending on how far you can stretch your budget.

Remember, the right home loan structure can set you on the path to financial security by helping to reduce those interest costs, so take the time to explore your options with your Mortgage Adviser and reach out if you need a hand!

Rodney

📞 0274 555 863

📩 rodney.king@loanmarket.co.nz