Buying a house is the most important financial decision that most people ever make. The financial consequences of taking on a mortgage can have either a favourable or disastrous effect on your future prosperity depending on how well your mortgage is managed.
Money borrowed to purchase a house that you live in yourself is referred to as ‘bad debt’ as opposed to ‘good debt’ which is money borrowed to purchase a property or business that makes an investment return. Bad debt should always be kept to a minimum and repaid as quickly as possible.
The starting point with managing your mortgage is to buy a house that is well within your budget. Save a good deposit and buy the lowest value house you feel comfortable living in. Interest rates on mortgages can vary markedly over time and this is a trap when interest rates are low. A mortgage that is affordable at a low rate of interest may be beyond your means when interest rates rise.
It pays to divide your mortgage into several chunks over different terms, with some on a floating rate and the remainder fixed for different periods. This helps to minimize the risk of paying too much interest over the term of the mortgage or paying high penalties if you need to break your mortgage. If you are disciplined with your money, it can be helpful to have a line of credit that is only used in case of emergency. You will only pay interest on your line of credit if it is used.
Try and pay your mortgage off as quickly as possible by focusing on the chunks of your mortgage that are on a floating rate or fixed for a short term. Repaying debt should take priority over any long term saving other than KiwiSaver.