'Fritter factor' could cost you thousands in interest - experts

Person highlighting bank account to identify extra spending
Fritter factor could cost you thousands in interest - experts Photo credit: Getty

Current mortgage rates mean that the average borrower is $200 per month better off than a couple of years ago and experts say that frittering the extra cash could cost people thousands in interest.  

The average Kiwibank mortgage customer owes $400,000 over 25 years.  Based on weekly repayments at 4.15 percent interest, the Sorted mortgage calculator estimates that $242,899 will be paid in interest - over half of the original loan amount, yet just $20 extra paid off each week reduces the interest by $18,495.      

Hannah McQueen, managing director of Enable Me said that typically, there are times in peoples' lives that allow them to get ahead and that people need to use this time to their advantage.

"You have your time in the sun, then you don't. 

"If ever there was a time to make progress [on repaying the mortgage], this is the time."

Maximising your cash surplus

McQueen points out that reducing debt faster doesn't mean going without, it's about maximising cash surplus and people need to look at where the extra spending is going.

"We estimate that people fritter around 15 percent of their income on things that make them no happier. 

"[Success is about] finding that fritter factor and channelling that into the mortgage," McQueen said.

As a guide, the amount needed at retirement can be based on current annual costs, multiplied by the expected number of years of retirement.

"Every dollar you can shave off the cost of your life now (and still be happy) means you don't have to pay interest on it for the [length] of your mortgage - and [at least] $25 you don't have to save for retirement," McQueen added.

For a budget to work, it has to be sustainable and this means factoring in what's personally important.   

In McQueen's experience, the most common non-negotiables for women are grooming, good food, kids' activities (if applicable) and the ability to give gifts, while for men they tend to be hobbies, socialising and alcohol.

Setting goals to reflect money habits

McQueen identifies three money personality types that determine behaviour: shopper, saver or plodder, while attitudes to saving and investing can be classified as safety, adventurer or dreamer.

"Female shoppers tend to spend little amounts often, whereas [male shoppers] can be quite tight on a day-to-day basis, but when they find [what] they want to purchase, they can feel quite justified in purchasing it."

"Shoppers need to have big financial goals [to draw them away from spending].   

"A shopper who is also an adventurer might spend their savings, but they're great at paying off debt - they just need a big goal to get them excited about the possibilities," McQueen explained.

Saving 20 percent of household income is ideal for faster debt reduction and wealth creation, but McQueen said it's by no means the average.

"Given we estimate that people fritter approximately 15 percent of their income on things that make them no happier, finding that fritter goes a long way towards achieving this goal," McQueen said.

Bank interest rate and structure

To take advantage of the current low mortgage interest rates, Tom Hartmann, managing editor at The Commission for Financial Capability encourages people to be aware of current deals and use this knowledge to negotiate with their bank.

"[It's important for people to] think about their whole financial situation with their bank, for example, if there are savings, how they can be used to offset the amount of principal [that's attracting interest]," Hartmann said.

As an alternative to revolving credit, Hartmann said that some banks will allow up to 20 percent more to be paid on a mortgage without a penalty and encourages people to check their bank's loan policy. 

While cutting back is not exactly exciting, going without something small in the short-term can give people the opportunity to save thousands in the long-term.

"The key is to run your numbers, using a tool such as the Sorted mortgage calculator. 

"Small increments each week can make a [huge difference] to the total cost of a mortgage, meaning the time it takes to pay it off is significantly reduced," Hartmann added.

Chris Greig, general manager, borrowing and investments at Kiwibank said that compared to the 4.79 percent mortgage rate of two years ago, an average mortgage refinanced at the current rate provides an extra $100 per fortnight in the back pocket. 

"If repayments were kept at the same level, on a 25-year mortgage, $100,000 would be saved and [the loan repaid] almost four years sooner." 

The current environment of low-interest rates makes this an ideal time to re-prioritise what you need to spend money on to make you happy and channel what's left over into the mortgage.   

By going through bank accounts, setting financial goals and renegotiating your bank interest rate and/or how your loan is set up to support extra payments, you could be significantly better off in years to come.