Avalon’s Money Thread – should I pay off my home loan as fast as possible?
I have always thought that paying your mortgage off as quickly as possible is a ‘given’. Not according to these guy’s. That did worry us.
I actually heard a rather good explanation of this from the ASB advisor. I had always thought that getting the mortgage off your back was to be our first priority, and for many people it may still be the best option so I wouldn’t discount it out of hand. That really depends as far as I can see on your personal circumstances, finances, and how good you are with money. I fully believed in this principle when I came here purely from reading the Anita Bell books. I had never really appreciated just how much money you actually pay for a house when you take into account the interest payments over 25years.
Our house cost $595k to buy. But over 20 years taking a 265K mortgage will add 269K to the cost so it will actually have cost us $864k to buy! Interestingly – if you are me anyway – by paying fortnightly for the whole 20 years we save a whopping $53,000 on the cost of our house- that’s a whole lotta coffee!
15142 cups to be precise
However where the advisors are coming from is that if you pay off your mortgage and only do that, you still have no savings with which to live on, so you still have to work to earn an income. Whereas if you were to save / invest at the same time as overpaying a bit on your mortgage you get rid of the debt earlier (and save money on interest charges) but you also have money set aside that you can now live on (or investments that generate an income). That’s the idea anyway!
Hi, everyone, pardon me if I’m asking a silly question but from reading the forum, I have this feeling that most people take up mortgage loan of about $200K to purchase a house, even though they may have the spare cash. Can anyone enlighten me on the reason for such arrangement?
Well, I can’t exactly answer that as for a start if I had $200k in cash hanging around – I would have used it to buy the house instead of taking a mortgage. However – there are 2 theories that could explain at least why some people would do it.
Firstly – revolving credit mortgages are popular here. We have one of these, and part of our mortgage is on this scheme. (About $100k) Now we didn’t actually need the whole 100k, as we have some extra savings, so at the moment only about 60k of that is being used. A revolving credit facility is like a big (huge) overdraft limit. So in our case we have an overdraft limit of 100k, but the balance is only about 60k overdrawn. There are 2 reasons that we have done this:
(1) we don’t pay interest on the portion of the “mortgage” that we don’t use, we only pay it on the 60k,
(2) If we need that money in a hurry we don’t have to ask the bank for a new loan, it’s already “approved” and that money is available at mortgage rates (though please see post on revolving mortgages for why you need to be very careful of doing this).
The other thing that we do that goes against the “get rid of the mortgage fast” is that we are saving to invest alongside paying extra on the mortgage. This money will be used to buy shares to start with and this was a really big thing to get my head round. It’s all very well having no mortgage but do you have any money to live on as well. My parents are a good example of this. They have used $200k to buy a stake in our house. With our money, and our mortgage plus their 200k, we bought 1 big house. They have the money to get rid of at least a huge chunk of our mortgage but they would have nothing to live on (as they have very little income).
Something else I did remember if you are buying now, the exchange rate is very poor (2.5 @ time of writing*), and in some cases it may actually be better to leave some money in the UK, pay an NZ mortgage and then bring the cash over when the rate improves. I can’t remember the numbers, but we worked out that if the exchange rate £-$ went up to 2.85, it would be worth us leaving money in the UK for up to 2 years.
* Oh for the days of an exchance rate of 2.5! Its 2.2 today – and thats up a bit.
Avalon’s Money Thread is a series of posts which were originally written in 2007 for an Immigration Forum. They came about by answering questions that forum members asked, about how to cope with the often difficult financial situation they face in New Zealand. They formed the basis of what was eventually to become the book Avalon’s Guide: after another year or so of drinking way too much coffee and finding out way more about taxes, money and investing that any sane person should.
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5 Comments on Avalon’s Money Thread – should I pay off my home loan as fast as possible?
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Avalon’s Money Thread – should I pay off my home loan as fast as possible? | About Mortgage on
Sat, 3rd Oct 2009 5:32 am
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Alex on
Sat, 3rd Oct 2009 3:54 pm
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Domestic Executive on
Sun, 4th Oct 2009 7:04 am
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Avalon on
Sun, 4th Oct 2009 12:24 pm
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Avalon on
Sun, 4th Oct 2009 12:31 pm
[...] See the original post here: Avalon’s Money Thread – should I pay off my home loan as fast as possible? [...]
I know nothing of mortgages, but I do know of the current 2.2 exchange rate (£ to $) as it’s the bane of my life currently. It was around 2.1 last week at one point. I too am waiting for the 2.8+ mark, when I will drop everything in order to transfer the money I have sat in my UK bank account, into my NZ bank account. I also need to transfer my UK pension into a Kiwisaver scheme – again at the right time for the conversion to maximise my $$$s. Last year, when we planned our NZ emigration, the conversion rate was around 2.8. I wish I had a crystal ball at that time which would have told me that the conversion rate would drop to 2.4 around the time we left the UK, just when I needed to transfer some of my savings from the UK to NZ. Between me and my partner we had planned to move to NZ with $10,000 each to help us set up. By the time the rate had dropped, we’d both lost nearly $1000. That’s a lot of coffee too 
I wonder if the rate will improve, or get worse. Am I waiting for a rate we won’t see again for the next few years? Will the rate drop even more? I’m still being paid by a client based in the UK and worked out my rate pound for dollar and fixed the rate for 1 year – now I’m $500 short of what I *should* be receiving if the rate was at 2.8. This recession is truly teaching me all about the economy when I’d rather be blissfully ignorant and laughing my way through some money transfers 
Great post – we’ve been mulling over finances now we are back from our UK trip and we’re in the camp of balance your finances to suit your life. Although we’re determined to pay back our mortgage as quickly as we can we don’t want to be a slave to that. We have a rainy day fund which we decided to keep in the UK as security and kind of like a mini insurance policy if things went pear shaped in life financially. If we brought the money over it would enable us to make a significant dent in the mortgage but we’d then be left with little financial security to use if the situation arose. I stopped watching the exchange rate when we transferred our capital for our house across three years ago. It was a blissful $3.2 to the GB pound at the time and we “made” a lot of money by watching and waiting. It was only that high for about 3 days in June 2006 and hasn’t been that good since. Whilst we did well we had the luxury of timing things to suit us – if we were more constrained I’d just make the deal and not even think about what you couldn’t have. Why torture yourself?
Alex – I really feel for you.
This is the time to send money back to the UK – anyone in yoru shoes right now – its an awful time.
If theres any way at all you can hold off – do so and wait till the rate improves. Its pretty impossible for us mere mortals to know how long that will take of course, but I know that its always a cycle, so if it goes down – it will go back up again.
As for transfering pensions – I wrote a post about it in the original Money thread – but everything is different now as the rules changed. If you decide to do this, and need to go thorugh someone – then give Alison at Lyfords a ring and have a chat with her. I spoke to her when I was re-writing the pension stuff for the book, as I had no experience to go on with the new rules. She was lovely to talk to, and very good at explaining how it all works.
You do need to make sure you do it right, becuase if your fund doesnt go into an “approved” scheme you can be taxed up to 55% on it!
Ill try an email you some info on this – because I wont actually be publishing the chapter on here. And ill post the bit about money transfers next as well – while ive updated and improved the info for the book, the basics are in the original, so that might help 
DE,
That pretty much sums up the way I feel about money transfers. We had to move money at the time we did, becuase we needed it to buy the house – but when its done – its done and theres no point even thinking about it afterwards. I have tended to move small amounts since (£5000 which is teh minimum that you can move with Hifx. If I have the choice – I mone when the rate is good, if not – I move when I need the money.
(BTW – before anyone thinks I have a large stash of £££ squirreled away – I moved some $ back to the UK when the rate was low a few years ago.)
The mortgage is a big thing for me beuse we have rentals with high loans on them, and its a safetly precaution to pay off the personal mortgage. But I have also balanced that with having a slush fund which has been a huge relief this last year I can tell you. My 20 year mortgage will in the end taken 5-6 years to get rid off in total (1-2 to go now) and then I can start on the business mortgages.
Its a bloody good job I enjoy messing with mortgages
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