Pay Your Mortgage off Sooner with the Pay Down Cycle Method

With most mortgages having a default time frame of 30 years, there are many Kiwis who are keen to pay off their loans a little sooner. One of the ways to do this is by utilising the Pay Down Cycle Method, which is an effective way to repay your mortgage quicker.

There’s a bit of strategy involved in this one, but by structuring your loan right, you can find yourself saving $$$ in interest costs.

So how do you do it?

Say you currently have a home loan of $400,000. We split the loan and place a large portion ($370,000) of it on a fixed rate for 12 months. The remaining $30,000 is placed on a floating rate as a Flexi Home Loan (or Revolving Credit Home Loan). The goal is to pay off as much of the $30,000 in the year as possible and before the fixed portion comes up for renewal.

While you might be paying a little more in interest on a floating rate, it allows you the flexibility to make larger repayments towards your home loan, therefore minimising interest repayments in the long run.

Getting your income paid into the Flexi Home Loan is also an option, allowing you to further reduce your interest rate. For example, if you get paid $5,000 per month from your salary, this will mean you are only paying interest on the $25,000 until you take the money out again.

Many people then often make their everyday payments (insurance, utilities, etc) on a credit card, before then repaying the credit card before the interest-free period is up. It’s very important to ensure that if you are using this method that you do pay the credit card off before the interest accumulates, or you will find this method costing you more than you save!

This method allows you to take advantage of the interest-free money by paying your bills on your credit card, and allowing your income to keep the balance of your loan down and reduce the interest on your mortgage. By managing this carefully, you can then achieve your goal of paying down your $30,000 Flexi Home Loan, which means that next year you have $30,000 you can redraw, and the process starts again. With this method, you do have to be very disciplined and ensure you are making all of your credit card repayments on time. You also need to not be tempted to dip into the Flexi Home Loan money available, unless it’s really urgent to do so.

There are pros and cons to this type of pay-down method, and we recommend talking with a mortgage adviser to ensure it’s set up correctly and that you can actually afford to make the additional repayments to repay the Flexi Home Loan each year. If done right, however, this can be a highly effective method for repaying your home loan sooner and shaving years and dollars off your overall loan.

If this is something you are interested in exploring, get in touch with our Christchurch-based mortgage advisers, and we can explain the ins and outs and see if it’s in your best interests to utilise this method.

Get in touch with the Loan Market Agile team today!