Pay down Mortgage or Term Deposit?

[petergntm]

Hello again PFNZ.

I come here again asking for your wonderful advice please. My partner and I are planning on leaving NZ in November 2024 for a year or so to travel and work elsewhere before coming back to NZ to start a family.

We are currently having a discussion between ourselves between the best way of saving for this whilst managing our mortgage which we will be renting out whilst we're not here. We have two obvious options to us which my partner & I are disagreeing with. These are the below.

Option A - (Partners method) - Saving $3k a month in a term deposit for travel funds

Option B - (My method) - Saving $3k a month to pay down mortgage & use money already in offset account for travel funds

The numbers:

Option A - Partner has started a term deposit with Heartland Bank putting in $2k a month - on the 30 day one at 5.5%, (3.8% after tax I remind them) - This looks to be only $8/9 a month for $2k in an account

Option B - The highest interest rate portion of our mortgage is 7.05% with which the balance is at $130k - An extra $2k a month down payment on this portion of the mortgage would look to save over $100 a month.

For our offset account, this is charged at 7.89% and we estimate using $20k for 4 months before finding work and slowly paying back this back again.

Any advice/feedback would be much appreciated. I'm pretty sure that Option B works best in our favour just need to prove it to my partner

PS. If this is more of a question for a financial advisor then any recommendations on a good one then please let me know

 

[mimijo]

@petergntm It depends on how comfortable you will be when you return.

If your margin of safety means that you won't need extra liquidity when you return.

Saving to pay down the mortgage at these high rates makes the most sense. Only if you reinvest the cash savings when you return.

I would also double check your figures to make sure that you have everything calculated correctly

 

[petergntm]

@mimijo Thanks @mimijo We do have a good amount in the offset account already (six figures) which should mean we will be comfortable enough.

I also think paying down the mortgage now at these high rates is the right thing to do.

Yes I do need to double check the figures. I'm ok at maths but was getting my calculations mixed up I think. Any advice on how I would calculate would be great. Thanks again

 

[mimijo]

@petergntm Good luck with your travels, enjoy

 

[petergntm]

@mimijo Thank you

 

[odysseusreturns]

@petergntm I am not sure I understand how you calculated your savings - if you paid of $2k to your mortgage versus putting that into Term Deposit you are only marginally better off ($5 per month) - not $100 per month.

 

[petergntm]

@odysseusreturns Thanks @odysseusreturns Yes I think I was getting myself confused here.

I was doing the maths based on the below but not sure if this is the best way to do it

||
||
|Mortgage amount - $130,000|Currently charged 7.05%|
|Interest per year $9165||
|Interest per month $763.75||
|||
|Mortgage amount $128,000||
|Interest per year $7024||
|Interest per month $585||

Any advice on how I would calculate would be great. Thanks

 

[lovinganimals]

@petergntm I don’t think the savings are enough to warrant a financial advisor/huge amount of thought.

Do whatever you are going to be most comfortable.

For me I wouldn’t want to be paying floating rates. I would also want access to my funds. Personally id put it in either a notice saver or premium saver. Similar rates to a td/difference is fuck all.

With option b you are paying down your mortgage. It’s hard to get that cash back, and wherever you land you will need cash.

Also, why shift somewhere to work for just a year? Go for 2-3 years if you can, otherwise you are wasting your time.

 

[petergntm]

@lovinganimals Thanks for your comment @lovinganimals

Yes agree with you access to cash is important. As I mentioned in other comment we are luck to have access to a decent amount in our offset (six figures) so dependency on access to every dollar isn't as vital as it otherwise might be

We plan on being back in NZ for 2026 to start trying for a kid although I am open to being overseas, my partner is more keen to being back here.

 

[lovinganimals]

@petergntm How old are you both? Where are you hoping to settle?

 

[petergntm]

@lovinganimals Both lower-mid 30s. Will probably settle back in Auckland and looking at Europe to settle for a year or Oz as a plan B

 

[lovinganimals]

@petergntm Go for a long holiday then, a year isn’t long enough

 

[spence]

@petergntm This seems like a very simple choice. Your offset account has the highest interest. Higher than term deposit, so why wouldn't you just dump all you money there.

Very simple.

Term deposit looks up your money, offset account does not.

So again offset means you have full access to your money if you want it.

The only positive I can see for a term deposit is if you want to prevent yourself from over spending by locking up that money so you can't access it.

 

[petergntm]

@spence Thanks for your comment @spence

We are in the fortunate position to be currently offsetting fully this portion of our mortgage. Additional funds in this account are not required.

That's why we're considering either extra mortgage payments or a term deposit.

Good point on the term deposit and security that it brings and not being able to access it

 

[spence]

@petergntm Paying down the mortgage that has a higher interest rate than term deposit (your non offset) still seems like the best option as long as you don't need to access that money later, which it sounds like you don't.

 

[petergntm]

@spence Thanks @w3bd3v_Pick1394 That's what I thought.

We don't need access to that money. I plan to dip into a little of the offset amount that we have saved up and then paying that back once we are earning again

 

[peersj54]

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[petergntm]

@peersj54 Thanks for your comment @peersj54

Agree that term deposit savings are not going to be too high for a 6 month period.

Also agree that it's better to have more more saved up. We don't want to miss out on experiences. We are travelling to SE Asia first and then Europe in the new year with a plan to settle in Eastern Europe.

 

[peersj54]

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[petergntm]

@peersj54 Thank you @peersj54