Paying off debt is a form of saving and the current low mortgage rates offer an opportunity for property investors to accelerate debt reduction.

The faster and more cheaply debt repayment can be made, the more dollars are saved.

In real estate investment, saving by cutting debt simultaneously increases equity - which could be used later as security for renewed borrowing to acquire more property.

Right now mortgage rates are probably about as low as they will sink in New Zealand before heading back up again, once the interest rate cycle turns.

So how should property investors respond to this apparent trough in mortgage rates?

Every investor’s case is different, which makes professional lending advice essential for the optimal outcome in debt management.

For the sake of illustration, let’s imagine a simple case of a couple of real estate investors, John and Jane Kiwi, who have mortgages outstanding on their family home and a rental property.

The mortgage on the rental is interest-only in order to maximise tax deductibility benefits, therefore it doesn’t entail principal repayments.

On the family home, there’s a table mortgage with fixed repayments that include both principal and interest components.

Two key strategies present themselves for John and Jane to effect debt reduction: cutting interest costs and accelerating principal repayment.

The most obvious one is for John and Jane to seek mortgage loans at the lowest available interest rates in order to diminish total finance costs.

This strategy can run afoul of break fees that might apply to terminating existing loans in order to refinance to new ones, although incentive payments may offset the cost.

The second strategy requires extra principal repayments to be made out of savings from surplus income.

This option may not be available to John and Jane if their investment property is negatively geared to the point where their savings are subsidising it.

Let’s suppose, however, that regardless of whether the rental is negatively geared, positively geared, or breaking even, John and Jane do have savings left over after meeting all their costs, including mortgage payments on both properties.

Finding ways to cut the amount of principal outstanding on their family home has the benefit of leading to substantial shrinkage in the total cost of the table loan, including interest, significant reduction in the length of the mortgage, and more equity being freed up to borrow against in future if required.

A number of ways are available for John and Jane to attack principal reduction with their savings.

Some fixed interest table mortgages permit voluntary extra principal repayments to be made over and above the scheduled amount to a certain limit without breaking the mortgage and incurring penalties.

Alternatively, the mortgage could be divided into fixed and floating components, with extra savings diverted into the floating part to pay down principal more rapidly without risk of penalty.

Another option is a tailored mortgage product* such as the one offered by BNZ, in which extra instalments are automatically built into the normal mortgage repayment schedule (which you can choose to accept), along with interest payment timing techniques, in order to accelerate principal reduction.

Rules for repaying extra principle vary from loan to loan and lender to lender, but the general idea is accelerated repayment of principle is usually allowed up to certain levels without breaking the terms of the loan.

With interest rates currently so low, it could be opportune for such property investors as John and Jane to seek professional advice on the appropriate types and structures of mortgage finance to use in order to apply their savings to making some serious in-roads into debt reduction.

Ask Sandy: Email your questions about property investing to Sandy_Richardson@bnz.co.nz Sandy Richardson is a national manager at Bank of New Zealand and heads a team of property managers who specialise in residential property investment.