The Mortgage Payoff Playbook: Myths, Magic & Smart Money Moves

Three Methods to Pay Off Faster

Daniel: Hello guys, and welcome to the next episode of the Blueprint Podcast. I'm here with my co-host Rory, and today we're tackling some tough subjects—ones that we really like to talk about, actually, because there's a bit of controversy on how to actually pay your mortgage off faster. So many different people have so many different ideas of the best method of debt reduction. Some people think it's investing. Some people think it's hammering down your mortgage as quickly as you can. There are all these different methods you could incorporate. But we're going to bust some myths today. We're going to give our opinion—the Blueprint opinion—and we're going to talk a bit more about those methods and explain them with some numbers too.

Rory: Yeah, absolutely. And I think the key message you've just made is that there are some promises out there about certain numbers and timeframes for paying off your loan. What we want to get into today is practical steps that people can take to make a real difference to the amount of interest they pay the bank.

Daniel: I think a lot of people will be interested in this because we're talking about first home buyers here in our examples, and they could be any age—people in their 20s or 30s—and there's a scary number next to that loan balance, and it's usually 30 years.

Rory: That's right, which could seem like a lifetime away. So this will be really interesting, Dan, and I know you've got some great examples to work through. So, the first step—what's our first example of paying your mortgage off faster?

Daniel: Yeah. So I suppose the best place to start is, we'll build a bit of a case study and we'll work around that. So I've got a bit of a plan. Let's say we've got a couple—let's call them John and Jill. They've got a mortgage, $800k balance, and their property's worth around $1.2 million. So let's say they're maybe three or four years into home ownership, or they had a big deposit. So there's a bit of equity there. And the reason for that is so I can show all the different options—a large size mortgage that they're trying to pay down as quickly as they can.

Rory: Cool. Okay. So this is the client we're going to work off, and we're going to address a couple of the main methods. So there are three main methods that you can consider to actually pay your mortgage off faster. So we're not doing any clickbait headlines, we're just giving the truth. The first one is actually paying your mortgage off faster—doing things like keeping your repayments the same when the interest rate drops, or increasing your repayments, which we'll take a look at. The next one is the revolving credit method. Instead of making lump sums on your mortgage, you can actually retain some of your cash and offset your mortgage, reduce your interest costs, and in the long term pay less interest and pay it off quicker.

Daniel: Brilliant. And the next one, which is a bit more controversial, is investing—buying an investment property, holding it through a property cycle, and using the proceeds to pay off your mortgage.

Rory: Yeah, nice. And as we go through them, I'll pick your brains a bit and we can get into the pros and cons of each, and the risks with each, if any.

Revolving Credit in Action

Rory: So let's start with revolving credit. I think it's a good one because when you're doing the insurance for our clients, you can see the structure we're setting our clients up with, and often there is a revolving credit in there. Clients always ask me questions: why does this one get a revolving credit? Why is this client not getting one? So that's another thing to touch on before we get into this. This is very general financial advice. We're speaking to John and Jill's situation, not speaking to everyone. If you want specific financial advice, you need to chat to your financial adviser, disclose all your information so they can give you really accurate figures.

Daniel: But we're speaking to a couple of the methods we've seen people have success with—our clients have had success, and us personally. And what people are actually talking about when they say "pay your mortgage off faster." So here's the first example. We've got the $800k mortgage for John and Jill. Throughout this example, we're going to use a 6% interest rate. So throughout interest rate cycles, very often interest rates are less than 6% over 30 years. By using 6%, I feel we're being conservative in terms of how much this is actually going to cost. We're starting off on a 30-year loan term. You can see their repayments are weekly at $1,100 on the 30-year loan term.

So if they didn't change a thing, if the interest rates stayed the same throughout the whole loan term, they'd pay their mortgage off in 30 years. We're also going to make an assumption that outside of the weekly repayments every year, John and Jill are able to save $20,000. So they can save $20k every year, and they want to put that towards their mortgage.

Now, John and Jill have also told me that they don't want to fully commit every single dollar towards the house. They want to have access to credit, or their cash, so that they can redraw it for either renovating the property, or just to have some security for the family. They don't like the fact that every single dollar is going towards the house—there's no savings. So, that's why we're going to take a look at revolving credit.

We're taking a look at the next sheet now. This is after 12 months. So, they've had a successful 12 months. They've paid off their first $10k of the mortgage—principal and interest stable loan. That first 12 months, it's pretty sad. There's a lot of interest. That's off their standard repayment. They've paid off $10,000 in the first year, just off the standard. You pay off $10k on a loan of that size. So you can see here, they've paid off the $10,000, but they've also saved that $20,000. We've put $20,000 into a revolving credit facility.

You can see here, loan type: revolving credit. So that's at the end of year one. I've saved it. It's gone into my bank account. And now I've created a revolving credit.

Rory: And now you've sat down with Dan and said, "I want to make a revolving credit. I'm ready."

Daniel: Yeah, hit me.

Rory: Yeah, okay. And we set you up on your anniversary.

Daniel: Let's say you're fixed for 12 months. That's the date we'll do it. Okay, sure. 12-month fixed. We've put in $20,000 and now we're offsetting that $20,000. So on this $20,000 of mortgage—remember it's still mortgage, it's just called a revolving credit now—you're offsetting it with $20,000. So it's essentially like a savings account or an overdraft account for your mortgage, where you're not paying interest on that money.

You can see if the $20,000 wasn't in here, there would be a repayment. You can see how this just went up here to $117. But because it is there, you're fully offsetting that amount. You're not paying interest. Important to note, revolving credit products have a higher interest rate. We've just assumed a 1% higher for this exercise.

These aren't real rates right now. We're just looking at the example. A couple of great things have happened here. We're storing that money at $20,000, and we're paying less interest overall, because that's $20,000 that we're not paying interest on. So the main fixed balance has actually reduced to $770k. But Rory, here's the magic. We've kept our repayments the same. We're still paying the exact same amount, that $1,100 just over. And the loan term has decreased. So remember, this is after year one, beginning of year two. This loan term should say 29 years, but for the same repayment, you're actually paying off the mortgage in 27 years.

Rory: That's brilliant. You're with me?

Daniel: Yeah. Incredible, right? So now we've set up our clients in a position where their payments are the same. They've got $20k reserves if they do need it, but that money's working in their mortgage. That's fantastic. So it's a really good opportunity for them to now double down and focus that same amount they're paying weekly on the principal.

So it's a good result here, but let's see what happens in year five. Let's say they do the exact same thing for three years. Every single year, they're adding $20k in savings. What's that going to look like? Let's jump over to the next sheet. You can see here, now their revolving credit is $80,000 because the last three years they've added $20,000 to the revolving credit. So four years they've saved $20,000, put it in the revolving credit.

Rory: Exactly.

Daniel: Now, what's happened in the last three years, they've paid off an additional $43,000, and they've also saved $20,000 each year, like we mentioned. So they've paid off an extra $43,000 of principal. Throughout the whole time they've kept their payment exactly the same. We haven't had any benefits or privileges of lower interest rates—we're assuming the exact same rate. Now you can see the revolving credit here is $80,000 in cash reserves sitting there offsetting their mortgage. But also the loan balance has come down to $667k.

Because every time that $20k comes up, they're chiselling off a piece and putting it in the revolving credit. So now with the same repayment, they're on a 20-year loan term after four years. You can see that's 20 years remaining, so that shaves six years off, is that correct?

Rory: Yep, that's right. So now they're in year five, and they've got 20 years left, versus where we started at 30 years. But now they've still retained the revolving credit, so they can use that if they need it. So there's a bit of power there in terms of cash available.

Daniel: You know, they're not fully committed, but instead of having it in a savings account that's a lower interest rate—obviously you're paying more on your interest than you're earning in savings—they've got it sitting there in their revolving credit.

Rory: Brilliant. It's pretty powerful. So this is really good for people who have got some excess cash that they want to be saving. They might ordinarily have put this into a savings account before they were homeowners, but they also want the advantage of having access to those funds for a rainy day or an emergency, whilst gathering interest savings at the same time. Because that's what's happened. Commonly people will start paying off their mortgages and say, "Look, we feel like every dollar is going towards the house and we're one emergency away from being in a bit of trouble." Or you can have that rainy day fund, but you can actually have it working for you. So this is a great way—you can see how if we just kept going through this every year, we're going to pay this mortgage off in about 15 years compared to the standard 30 years, just by using this method.

Daniel: Obviously, the more that they can save, the more that they can increase that revolving credit, the quicker you can pay it off. So it's not a myth that we can pay off our mortgage in 15 years.

Rory: Yeah, 15 for sure. I mean, seven… Yeah, seven is a bit controversial. I'd like to see that example. What are the drawbacks here, Dan? So, you've got to be disciplined. Have you seen any traps where people have set this up and then come out worse off?

Daniel: I definitely have, through lack of discipline. The thing is, we sit here with our coffees and say, "This looks fantastic." But at the end of the day, life doesn't work out exactly how you plan, right? You might go down to one income in the household, get made redundant, or you're just not able to save. And so if you can't hit those goals every year, then it's not going to work in your favour, because obviously the revolving credit rate is higher, you actually risk paying more interest.

Rory: So you're exactly right. It does require a lot of discipline and frequent review and financial planning. If you're doing this every 12 months and keeping an eye on it, most likely it's going to work as long as you've got that discipline. But if something's happening, you just let a couple of years go by and you've got this revolving credit that's got no offset, no cash offsetting it, then it's actually not a beneficial method.

Daniel: Yeah, absolutely. Brilliant. So that's our first method.

Investment Property as a Vehicle

Rory: Now we're getting into the one which I think is your favourite. It's the very controversial one—the seven-year method.

Daniel: Yeah, the coveted seven-year method. This one is the one that we see advertised a lot, or people are referring to: buying an investment property and using the capital gains of that property to pay off your owner-occupied mortgage.

Rory: Nice. Now, initially when I say that, as an insurance adviser who's dipped into property investment, what are your thoughts about that? Do you feel like it's feasible? I mean, does your brain bring up some risks to that? What do you think?

Daniel: Well, I think there's a lot of factors, like your investment horizon. Property markets are currently down, depending on when you bought. Again, it depends on your horizon, so there's risk in property. I think if you zoom out over time, it's a pretty safe bet—has been—but there are no guarantees.

Rory: Well, that's why the question marks come with the seven years, right? Because if you read information about property cycles, they're longer than seven years. The premise of it is just suggesting that it's putting too short of a timeframe, in my opinion, on how long it actually would take to achieve something like this—using your investment property to sell and then pay off your mortgage. We could manufacture an example and support the seven-year method, but there's a lot of things that would have to go right for that to come true.

Daniel: Yeah, timing the market becomes a factor, which in investing you never, ever, ever want to have anything to do with—timing a market. You know, your time in the market is what you want. If you're trying to depend now on external factors, other than letting inflation and cycles do their thing, then you're setting yourself up for disappointment.

Rory: Yeah, sure. And then the risks of having multiple properties, and then increasing interest rates and serviceability risk and all those things are pretty high if we're trying to go for a rapid method of taking up that load. We love property investing here at Blueprint, but we love it long term.

So, we've got the Blueprint Property Investment Calculator here and we're going to go through a scenario for this method—using an investment property as a vehicle to pay off your mortgage quicker. Let's go back to John and Jill.

Remember that they had a bit of equity in their property, so you can use your equity as a deposit for a mortgage. And that's what they've done in this case. So they've fully financed a property for $650,000. That's a $650k mortgage. Once again, the interest rate is 6% and we've done an interest-only mortgage, which is a $750 weekly mortgage that they're paying.

In terms of rental income, what I've tried to do is put something sort of middle ground. In Auckland and all the major cities, you struggle to get a 6% rental yield. You would struggle, but regionally you can get much more than 6%. So we've tried to find a nice middle ground between capital growth and your cash flow, which are always the two pillars of property investing that you're balancing.

So we've got a 6% rental yield, which is $750 per week, that we're working off. I've got the expenses here. You can see the generic expenses: insurance $1.6k, rates $2.5k, and annual maintenance of $4k. We've also got a property manager in there as well, at 8%.

So, what do these numbers end up working out at? If you're holding this property long term, your cash flow is going to be negative every week—negative $215. Okay, so that's you topping up out of your own pocket, $215 a week, to keep this investment property ticking along.

How does this affect you over a year? Annually, it's $11,220 negative cash flow. And over the 10-year period, it's a negative $112,200. So you've got to be mindful of the opportunity cost here.

That $112,200 could go towards paying off your mortgage quicker, rather than investing—it could go to investing in other opportunities. There's always opportunity cost that we have to be mindful of, but we're putting it into property now. So what we've done over this 10-year period is we've also assumed a capital growth rate of 4%.

Now, there are arguments for a 3% capital growth rate, there are arguments for a 6% capital growth rate. Once again, we've assumed 4% to be conservative. So, after 10 years holding this property, this is the projected value: $962,000. Pretty nice profit, right?

Daniel: Good gains, yep.

Rory: So let's play this out. How does it actually look if we use that to pay off our mortgage? So, the balance of your mortgage—say if John and Jill just had the same mortgage and paid it off over a 10-year term—the balance will be $670k. Now, let's say they use the net profit from the sale of their investment property, minus agents' fees and lawyer fees, which would be about $272k. They use that to pay off the $670k, make a lump sum payment. So their loan is going to reduce to $398,000. You can see it here—$398k at a 6% interest rate.

Now, what happens after we do this? If we keep their weekly repayment the same, roughly the same at just over $1,000 a week, they've reduced their loan term to 10 years to pay it off.

Daniel: So, 10 years?

Rory: 10 years, yeah.

Daniel: Total term, 20 years?

Rory: Total term, 20 years from this exercise. There's no paying off your mortgage in seven years unless you do a highly speculative capital growth property development. We're not even going to entertain those numbers—it's just not going to happen. Or we need multiple houses and to take on more risk, which for that timeframe is just not advisable. If clients are in a position to buy many investment properties, that's great, but we would never recommend it for just a period of seven years. It's an achievement to get a first home.

What we want to look at here is that capital growth rate, and over time, consider the rent from that property would keep increasing. The property would be cashflow positive at some stage because of how inflation is going to keep causing rents to rise.

It's nice that in 10 years you can sell it and pay it off, but imagine what you could do in 20 years if you held that property an extra 10 years. With John and Jill, they'll be able to sell the property, pay off the remaining mortgage, and have cash at bank. Or be in a position to invest again.

Daniel: This was costing them $11,200 a year, versus the revolving credit example was $20,000 a year. It's a leaner example in terms of additional costs.

Rory: It actually is. So the numbers—and I've used some pretty conservative numbers in terms of maintenance, management fees, those sorts of things—are pretty realistic in terms of what we're seeing with our investors right now and what it's costing them in a higher interest rate market. Both are great options, but with the property investment option, if you give that another 10 years, you're just way better off.

Daniel: Absolutely. What's the downside, what are the risks of this versus the revolving credit?

Rory: The biggest risk is with the revolving credit method, it's a guaranteed return. So, you know for sure that every dollar you put towards your mortgage, you're getting a return. With property investment, we can't forecast the cycles. There's really good data for the last hundred years in New Zealand as to what happens when you just let inflation do its thing and devalue your debt and property. But we can't guarantee that. So, that's the main risk. Property investment does have inherent risks. You've got vacancy risks with your tenants. You've got tenants who might wreck your property.

Daniel: Have you got an example, a real world one, where you've seen this go wrong—the pitfalls that you've seen or heard someone falling into?

Rory: People over-leveraging or just people not being patient. Property investment is really easy when you give yourself a lot of time, and it works really well when you give yourself a wide berth and a long investment horizon. But when we see it not working out for people is when they don't have that long-term vision. Purely a short-term speculative play—you're just never going to be happy, unless you're a calculated property trader who knows exactly what's going on and you're putting all your time into it. Passive long-term buy-and-hold investing is the best way to build wealth, in my opinion.

Keeping Repayments When Rates Drop

Daniel: We're going to go to the last one, which is my favourite and it's super trendy right now.

Rory: Oh, that's incredibly trendy.

Daniel: The reason it's trendy is because interest rates are dropping, right? We've been in this period—now we've had higher rising rates for about four years and now they're coming down. So we're finally able to give some really good news to our Blueprint clients who are listening: that rates are coming down.

Jumping into our next sheet, where you can actually pay off your mortgage quicker by doing absolutely nothing. Like I said, Rory, can't get enough of this method. Just cannot get enough. In all our fixed rate reviews at the moment, clients who are coming up for their review, I'm always pushing to see if we can keep the repayments the same as interest rates drop.

We'll look at a couple here—$800k mortgage again, 6% rate, but we're going to make an assumption that the rates drop to 5%.

Rory: Nice. Disposable income.

Daniel: I mean, that's what you'd think. But I'm trying to say, let's not change the repayments, because every single dollar that you put towards that extra payment now is going towards your principal.

So if we just look at this example here, let's say that the interest rate drops to 5%. Now, you would have seen here the scheduled payment has dropped by $501. So, let's take that $501 and put it towards the principal. This is monthly repayments, by the way. You can see here, the repayment term has reduced to under 24 years.

So we've shaved off six years plus. One percentage of savings—that's an easy method, providing you're pretty comfortable living with the 6% interest rate repayment, which we assume we are. This is a first home buyer on 6%. But my favourite thing is, look how much interest you're saving between the difference.

So $569,000 interest here is what you pay over the life of the loan. If I take it out, almost an extra $200,000 in interest that you're going to pay. It's incredible, isn't it? Just that compounding interest because you're not paying it off quicker. So that's a bit of a superpower—actually paying off your mortgage quicker.

But those are the only real three ways that you can achieve something like that. Obviously, there are many ways within that you can do it, but I suppose we just want to let our clients know, whenever you guys hear those sorts of things from advertisements or media talking about how you can get your mortgage paid off in seven years, ten years—these are the core ideas. And we think the seven, ten-year timeframe is probably a bit unrealistic. But if you had a chat with us when your fixed rate comes up, we can give you guys the ideas and give you specific tailored advice as to how to actually achieve that.

Rory: Yeah, absolutely, Dan. That's been really interesting. And I think we could probably title this episode "The Things the Banks Don't Want You to Know." Dabbling in all three would probably be a pretty successful outcome for most families.

Daniel: Wealth building exercise—absolutely agree. What was your favourite?

Rory: Investment property, seven years, mate. I think they're all really good. The revolving credit is fantastic in terms of if you're a first home buyer, putting away a bit of security, but at the same time reducing interest. It's fantastic. Absolutely. And then taking advantage of interest rate drops, as we've just talked about—it's powerful. That's a $200,000 saving in this example alone, just by keeping your repayments. And really achievable. And then obviously, the next level is an investment property, I think.

Daniel: A hundred percent. I think the investment property comes once you build a bit of equity. It's a great wealth-building long-term tool. You just need to make sure that what you're actually getting out of it aligns with what you're buying, so that's why it's so important to chat to an adviser or even just a property mentor.

Rory: Awesome, Dan. Thanks so much for joining us on this episode. We really appreciate you guys listening—our existing clients, future clients, and our referral partners. Thanks so much for your business and supporting Blueprint. We love taking care of you guys and we'll see you on the next episode.

Daniel: All right. We're going to go do our day job now.