A few tips to help you pay off your loan faster

Is there a way to pay off a loan faster without significantly reducing one's quality of life?

Assuming the loan interest rate is calculated at the currently common one-year fixed rate of 4.59% , for a 30-year mortgage, if you only pay the minimum payment amount slowly, a large part of the early payments will actually be interest payments.

Therefore, the truly smart approach isn't necessarily to aim for the lowest possible monthly payment every time, but rather to use some clever methods to reduce the principal faster. The faster the principal decreases, the less interest you'll need to pay in the future, and the sooner you can pay off the loan.

The following methods are suitable for most New Zealand families with mortgages.

01

Within your means, proactively increase your repayment amount slightly.

Many customers, after their loan is approved, will default to making only the minimum payments given by the bank. This is certainly not a problem, but if your cash flow allows, making a little more payment every week or two will have a very significant long-term effect.

For example:

Assuming a loan amount of $600,000 , a loan term of 30 years, and an interest rate of 4.59% , the monthly payment would be approximately $3,072 .

If you pay more each week:

Paying an extra $50 per week can allow you to pay off your loan approximately 3.8 years earlier, saving you about $75,000 in interest.

Paying an extra $100 per week can allow you to pay off your loan approximately 6.7 years earlier, saving you about $130,000 in interest.

Paying an extra $200 per week can allow you to pay off your loan approximately 10.9 years earlier, saving you about $204,000 in interest.

Many people believe that prepaying a loan requires a lump sum payment of tens of thousands of yuan, but that's not necessarily true. What's truly effective is to make regular, consistent, and gradual payments over a long period.

02

Change the repayment frequency to once a week.

Many customers are used to making monthly payments, but if you set your loan to be repaid weekly, your principal will be depleted more frequently, and you will save on interest accordingly.

Using the example above again:

A loan of $600,000 over 30 years at an interest rate of 4.59% would have a monthly payment of approximately $3,072 .

If you switch to paying $709 per week, although the repayment amount is the same, you'll find that the total interest accrued over 30 years will actually be $755 less than if you paid monthly.

In other words, by simply changing your repayment method, you can save $755 in interest expenses over 30 years. The advantage of this method is that you won't feel the change in each payment, but the principal will decrease more frequently over the long term. Although the savings are negligible, it does save money.

03

Use extra income for partial repayment

If you don't have any immediate use for some of your savings, you can consider using a portion of it to make early repayments.

Assuming a loan of $600,000 at an interest rate of 4.59% , if additional payments are made in the initial stages of the loan:

Paying off $5,000 in one lump sum can clear the loan about six months early, saving approximately $13,700 in interest.

Paying off $10,000 in one lump sum can clear the loan about a year earlier, saving approximately $27,000 in interest.

Paying off $20,000 in one lump sum can clear the loan approximately 1.9 years earlier, saving about $52,000 in interest.

The key here is not how much to repay at once, but to reduce the principal as early as possible with the additional funds. The earlier the principal decreases, the less interest will be generated in the future.

However, please note: if your loan has a fixed rate, early repayment may be subject to bank restrictions and may incur fees. It's best to confirm the bank's allowed amount and conditions before making any decisions.

04

Use Offset or Revolving Credit appropriately

If you usually keep a certain amount of cash in your account, such as emergency funds or short-term savings, you may consider using an Offset or Revolving Credit structure.

The core logic of this type of structure is:

This allows your savings to temporarily offset loan principal, thus reducing interest payments.

For a simple example:

If you have $50,000 in savings and a $600,000 mortgage, under an offset structure, the $50,000 can offset some of the mortgage interest. The bank might only calculate interest on $550,000.

This is more effective than keeping money in a regular account, especially when loan interest rates are higher than deposit rates.

Customers suitable for this type of structure typically have several characteristics:

I have a relatively stable income, a good saving habit, and don't readily use my emergency funds. I want to maintain financial flexibility while also minimizing loan interest.

05

The loan structure is re-examined each time a refix is performed.

Many customers, when their fixed-rate loans mature, only do one thing: check the interest rate offered by the bank and then directly choose a fixed term. But actually, a refix is a very good checkpoint.

You can ask yourself a few questions while you're at it:

Has your income changed? Do you have any major expenses in the coming year? Do you plan to renovate, buy a new car, invest, or move? Do you have enough cash to prepay part of the loan? Should you set up an offset or revolving credit line? Is it worthwhile to compare offers from other banks? Is your current loan structure still suitable for your current lifestyle?

Loan structures aren't set up once and then permanently. Family income, interest rate environment, bank policies, and personal goals all change. Therefore, before each refix, it's best to review the loan structure again, rather than just looking for the lowest interest rate.

In summary: When repaying a loan, the most important thing is to reduce the principal as quickly as possible.

Paying off your loan faster doesn't necessarily require a complete lifestyle change. Often, making a few key improvements can lead to entirely different long-term outcomes.

you can:

Pay a little more each week, switch to weekly payments, maintain the original payment amount when interest rates drop, use bonuses and extra income for partial payments, make reasonable use of offset or revolving credit, and re-examine the loan structure each time you refix.

Truly effective loan management isn't just about pursuing the lowest interest rate, but about structuring your loan portfolio to better suit your cash flow, reduce principal faster, and stabilize your family's finances. If you're unsure whether your current loan structure is appropriate, or if you'd like to know if there are ways to pay off your loan faster, feel free to contact Leon Chen Mortgage Limited for a loan structure assessment.

The above information is for general informational purposes only and does not constitute personal financial advice. Specific loan options need to be assessed based on individual income, expenses, loan structure, bank policies, and future plans.