So what do you do if you’ve got spare
cash? You know, it’s not something that generally happens when you’ve got a big
mortgage, but let’s say you’ve got leftover money at the end of every week
or month and you’re trying to decide what’s the best way to allocate
this capital. Should I just put it into my mortgage? Should I be paying off
credit cards? Yet, generally that’s the best idea, pay down the high credit card
debt. But what if you don’t have any other debts and you’re not really close
to being able to buy another property? Where should you put your extra money?
Well, there’s a couple of options that I’ll suggest to some clients,
and just bear in mind that I’m a registered financial advisor,
I’m not authorized financial advisor, which means I can’t give tailored,
specific investment advice, but we talk about general concepts here.
So one thing that might be worth having a look at is the offset facilities offered
by some banks. What this means is, let’s say you’ve got $100,000 of savings
or you know you’ve pre-paid your mortgage in advance, if your debt is $500k,
if you have $100,000 in your total money account or your offset account,
what that means is you’re actually only paying in simple terms debt,
you’re on paying interest on $400,000 instead of the $500,000.
So what you want to do if you’re paying your mortgages a lot faster is consider
that, if you ever want to be able to have the ability to redraw that money, using an
offset account is you know a good way to do that. What a lot of people get
caught out on is paying their mortgage off a bit really, really fast,
and their income situation changes, and they actually can’t get that money
back out when they need it. So this is a good option for that. Now,
one thing that you should be at least aware of is the revolving credit.
So revolving credit is when you’ve got, you know it’s like an everyday emergency
fund, it can go up and down, it’s like an overdraft that you can use
credit cards to pay it off. And if you need to draw down more
or pay off extra, what it means is let’s say your repayments are $3,000
a month, but you feel that that month you can put $3,500 into it,
that gives you that ability. And you’ve got to check the different
banks and the different rules, but revolving credits, it gives you more
borrowing, and if you’re disciplined, you can use those credit cards,
get the rewards points, pay off the debt before you incur extra
charges. And you know if you are looking at extra repayments, like I said before,
you want to be able to make sure that if redrawing the money in the future is of
interest to you, that you have investigated that. And you know there’s no
rocket science to this, you pay more, you’re going to…your debt’s going to get
cleared faster. But what you want to consider is, if you’re making these extra
repayments you might start on a 30-year term, you know you’re making extra
repayments, this is how you pay mortgage off in 17 years instead of 30,
or you know 10 years instead of 30 if you’re, you know, making the big bucks.
But what you want to consider is that, you know, maybe after 3, 4, 5 years,
you’re refinancing from your 30 mortgage down to like a 22-year mortgage.
And then you’re doing the same thing again when you’re paying it off faster and
faster. So refinancing is another strategy. We get in the cash-backs
which you put into your principal. So, cash-back is like you know,
a little incentive to join a new bank, that money goes into your bank account on
day one and you can use it as an extra contribution towards your principal,
which means you’re not going to pay interest on that anymore. Now,
there’s a lot to revolving credits. We’re not going to cover it right now.
But if you feel like you’re even like kind of disciplined with money,
and you’re already using credit cards, not such a bad idea. Now,
if you’ve got, you know, more than this, or, you know, you’re thinking, “Hey,
I can make a lot of money in the stock market or, you know, offsetting on 4.5%
or 5%,” whatever your mortgage rate is isn’t enough return on capital for you,
take a look at simplicity investment funds. So simplicity,
this is a KiwiSaver investment fund. And what you can do is you can switch your
KiwiSaver over to them, there’s no commission paid to brokers,
a very, very low fees, KiwiSaver fund, and they donate a lot of their profit
to charity as well. Now, they also have an investment funds
product where, if you got $10,000 or more, you can put money into the passively
managed index funds. They’re run by Vanguard, which is also a
not-for-profit, and you can get a spread and draw the money back out whenever you
want. Very low fee, really good returns in line with the KiwiSaver fund returns.
And, you know, if stock market’s trending up at, you know, 8% to 10%
or more percent annually, then you’re getting a very good return on that money,
which is still liquid, and this seems that you can take it back out.
And so these are just three of, you know, many different strategies on how to
allocate your money if you got spare leftover, what you’ve going to do is
work with your mortgage advisor, identify which one is going to be most
appropriate for you and it might be a few of them. But what we’ve is seen is a lot
of people have savings accounts, and they’re not offsetting or they’re
using credit cards but not effectively using the revolving credit strategy.
And basically what that means is the bank is taking your savings and lending your
money back to you at a premium, and you’re paying tax on all the interest
you earn on your savings. And if you’re not using the revolving
credits smart, then you might be getting the credit card rewards but what might be
happening is you’re just consolidating that credit card debt into your mortgage
every couple of years, which we see a lot of. So, try to get
on top of your credit card debts. If you need, consolidate them into the
mortgage and then be disciplined as you possibly can with your money so that you
can use strategies like this to pay off your mortgage even faster.