Ten tips to reduce your mortgage and other debts

Money, as the great poet Homer Simpson would say, is the cause of – and solution to – all of life’s problems. There’s no denying though that some more of it would be nice. Not enough of us, however, have the knowhow to take our dough and make it rise.

The Commission for Financial Literacy and Retirement Income realises this, and thus they have turned this week into New Zealand’s first, and hopefully annual, Money Week.

The official synopsis describes this as a “week-long series of financial education events and activities… around the country to raise awareness of how people can better manage their money and get help as they do that.” Good plan.

Their website has a list of Money Week events and links to some good debt and budgeting advice. Most useful indeed – tonight, for instance, I’m heading to a ‘Managing your Money’ seminar hosted by Westpac. If that doesn’t stop me buying a Big Wednesday ticket for tomorrow then heck, nothing will.

From the looks of it – and this is said with love – more Kiwis should attend these. The collapse of a few dozen finance companies in 2008, followed by the Global Financial Crisis, prompted many of us to brush up on their financial knowledge. Still, while showing an improvement, the ANZ-Retirement Commission 2009 Financial Knowledge Survey highlighted major areas of concern:

  • One in six respondents (16%) said they were having difficulty managing their money, rising to 26% of people in the ‘low knowledge’ category.
  • 31 percent are classified as having low financial knowledge. People in this group are more likely to be under 24 or over 65, renters rather than homeowners, and on low incomes.
  • Only 30% realised that investing in a range of shares would, long term, make a better return than fixed interest investments and savings accounts.
  • On the home front, those who know you can repay part of a floating home loan without being penalised dropped nine points to 46%.

Flava Flav giant clock bling

Time to stop buying bling and save your dolla dolla bills, y’all.

So, in the spirit of the week, here are ten useful pointers for those who are house hunting, paying off a mortgage, or just want to save some cash:

1. Get pre-approved. There is no point committing yourself to a house and then asking permission from the bank after. Getting pre-approved for a set amount will help discipline you into looking at homes at a realistic price.

2. Save as much of the deposit as you can – ideally 20%. Set up a savings account and harness the power of direct debit to add to it every payday.

3. The higher your deposit, the less you have to borrow, and the less interest you’ll have to pay. Banks often give better deals to those with bigger deposits, as they know you’re good for it.

4. Mortgage rates are at record lows. Make-believe they’re not. Paying off a mortgage as if the interest rate was still over seven percent means you will pay your mortgage off much quicker, and – again – save on interest.

5. Pay your mortgage off fortnightly, rather than monthly, if you can.

6. Talk to your bank about getting a lower than advertised rate – or “bully your banker” as Bernard Hickey once eloquently put it. There is so much competition out there between banks at the moment they’re bending over backwards to win new customers and keep the ones they have.

7. Should you fix or float your mortgage? Or should you do a bit of both? Fixed mortgages are coming back into fashion, but the answer may change from year to year as our economy ebbs and flows. Always talk to your bank, mortgage broker or another financial expert about what the right mix is for you.

8. First time buyer? The government is here to help. You can withdraw funds from your Kiwisaver, after three years, to use for a deposit. They also provide a first-home deposit subsidy of up to $5000.

9. On top of that there’s the Welcome Home Loan, administered by Housing New Zealand, which allows you to borrow up to $350,000 with a deposit of 15% of the amount above $200,000. Clear as mud? Their website explains all.

10. Finally: you’ll save more money by paying off a high interest incurring debt than leaving your money in a lower interest savings account.
Example: a mate of mine just got a fancy new job and a nice payout from the old one. She could have used that money to send me on a cruise or hold a party in my honour, but alas she did the sensible thing and paid off a loan that was inflicting some hefty interest. Eliminating such a debt saves you plenty in the long run.

Chances are, if you’re already doing all this, you probably have some other ideas up your sleeve. Feel free to share your advice in the comments or on our Facebook page.

And keep checking the Money Week website for even more advice, or just to wish them well. We hope this is the first of many Money Weeks to come!