The much-hyped tax cuts for 83% of New Zealanders over the age of 15 have come into effect. Whoop-de-do, I hear you say. And yes, for most of us you’d be right. Working-age New Zealanders will get an additional $16 a week on average. And that is not a lot to get excited about.
Tax cuts 2024 – how much do we get?
The amount we get varies depending on income level. A single pensioner gets an additional $4.31 a fortnight. Someone on $70,000 has another $30.75 in their wallet. Someone on $110,000 earns just over $40 a fortnight.
What you could do with your tax cut
According to RNZ, you could use your windfall to buy yourself 1kg block of mild cheddar cheese (average $10.03) and a dozen eggs. You could get about seven-and-a-half litres of petrol which, depending on how economical your car is, may be enough to drive about 100km. Another possibility is to run your heat pump for an extra 40 hours or maybe you could buy three coffees (at a cheap café).
How to turn $32.00 into $47,000
But what would you say if we told you that you could turn your measly $32.00 a fortnight into stacks of real money you could use to invest in your retirement, pay for your children’s education, or go on that dream holiday, and all without noticing?
Sound good? Ok, then read on to find out how increasing your mortgage payments by just $32.00 a fortnight can save you $47,000 in interest and shorten the life of your loan by 18 months!
To make sure I got all the figures right, I asked Aseem Agarwal, Head of Mortgages at Global Finance for some help. He kindly broke all the numbers down for me.
Here’s what I learnt
To start with we’ll get all the real basics out of the way. A mortgage is typically paid off over about 30 years. Regular payments are a combination of the principal (the amount borrowed) and interest which varies depending on interest rates and the balance of your loan. The less you owe, the less interest you’ll pay. This is where making extra payments can make a huge difference. By paying off your principal faster, you reduce the overall interest charged over the life of the loan.
The impact of regular payments
So, Aseem told me, “Imagine you have a $500,000 mortgage with an interest rate of 7.5% over a 30-year term”. My fortnightly mortgage payments would be approximately $1,613. Over 30 years, I’d pay a total of about $1,258,025 for my $500,000 mortgage: $758,025 or thereabouts would go purely towards interest. Agreed, not a fun thought!
Aseem told me to imagine interest rates have dropped to 6%. He suggested I do this because current interest rates are decreasing. My fortnightly payments would then come down to $1,383 per fortnight. He advised me that the best strategy here would be to tell my lender to keep payments at the old level. However, if I didn’t want to do that, he said I could still save myself thousands of dollars and years of mortgage.
The maths behind adding your tax cuts
“Now let’s add your tax cut. Suppose you use your extra $32.00 a fortnight to increase your mortgage payments. This might not seem like much, but over time the maths show it can have a significant impact”.
If my fortnightly payment is $1,383 (with interest at 6%) adding $32.00 brings my repayments to $1,415 every fortnight. This extra payment would go directly towards the principal, thereby reducing my mortgage faster.
Here’s how it breaks down:
1. Yearly extra payment: By adding $32.00 every fortnight, I’d pay an extra $832.00 toward my mortgage per year ($32.00 × 26 fortnights).
2. Total extra payment over 30 years: If I consistently made this extra payment, over 30 years, I’d have paid an additional $24,960 towards my mortgage.
3. Impact on interest: Because this extra payment reduces the principal more quickly, it lowers the amount of interest I have to pay. Shockingly, at least I thought so, I could save roughly $47,000 in interest payments by simply adding $32.00 to each fortnightly payment.
4. Loan term reduction: With these extra payments, I would reduce my mortgage term by approximately 18 months. Instead of taking 30 years to pay off my mortgage, I could be debt-free in 28 and a half years.
So, by paying $32 from my tax cuts which I didn’t notice, I save myself over $47,000 in interest because I pay my mortgage off faster!
The true savings are in the reduced total interest and shorter loan term
Even though $32.00 may seem like a small amount, it can lead to big things. These tax cuts provide a perfect opportunity to make extra payments without really noticing. By automatically transferring your tax savings every fortnight towards your mortgage, you effectively pay off you mortgage faster without feeling the financial pinch.
A clever way to leverage small windfalls
For anyone with a mortgage, this is a strategy well worth considering. It’s a smart way to leverage small financial gains to achieve a more secure and debt-free future faster. If you want the brightest financial future you can, then get expert help. Contact Global Finance to explore all your home mortgage options and get a solution tailored to suit you. Call the team on 09 255 5500 or email info@globalfinance.co.nz.