Yesterday I had a call from a married couple 15 years off retirement age who feel like they are not making much progress with repaying their mortgage.
They have a few debts outside their mortgage plus a reasonable sized tax debt to the IRD from a business that struggled during the Covid years. Although their mortgage is not big at just under $250,000 with payments of $1,500 per month, the payments of the other debts including the IRD are another $1,500 per month so their debt repayments total $3,000/m.
Although they make a reasonable income, they feel like they’re living day to day and they’re worried that they won’t have their mortgage paid off before they retire. Their current trajectory is that their mortgage will be paid off at age 75 (and hence they’d have to work until then unless they sell the property). They had spoken with their bank who had no options for them, then called me to see if I had any advice.
Over a 30 minute phone call we came up with a 2 step plan for them.
Step 1:
Make an application to a non-bank lender to refinance their $28,000 IRD tax debt and $22,000 of consumer debt= $50,000. That would also involve refinancing their $250,000 bank mortgage to the non-bank lender as banks don’t like refinancing tax debts, making a total loan of $300,000. This would see total payments of around $2,100/m which is down from the $3,000 total outgoings that they have at the moment. So this means that the clients only have one payment to make each month, the IRD is off their back, and their cashflow improves by $900 per month.
Step 2:
After 3-6 months, make an application to a bank with flexible mortgage products to refinance the $300,000 mortgage (a bank would accept at that point as they wouldn’t have a tax debt anymore). Choosing the right bank will allow overpayments on loans, allow the reduction of payments back to the minimum if required and also allow the redrawing of any overpaid funds should they need them. This allows the clients to aggressively pay down their mortgage whilst retaining control of their finances. Set the payments at $3,000/m (what they’re paying now) and the whole $300,000 mortgage would be repaid in 11 years, meaning that their mortgage is paid off at age 61 rather than their current trajectory of age 75.
We’re seeing more and more of these types of scenarios – one in five Kiwis still have a mortgage over age 65 these days and the increased cost of living won’t be helping. It does highlight the importance of having a plan for your mortgage. Of course the sooner you get a plan sorted the better but it’s (almost) never too late to seek advice and get on track towards a better retirement.
* This is not financial advice – contact us for personalised financial advice.
