Dollars and sense: How can I use a small inheritance to reduce my home loan?
Sunday, 26 April 2026
Senior business reporter Rob Stock answers your money questions. Got a question for Sunday magazine? Email it to sundaymagazine@stuff.co.nz
QUESTION: I have inherited a small, but not insignificant sum. I have a fixed term home loan. How can I use the money to reduce the amount I owe?
ANSWER: “Inheritances are the way most Kiwis pay off their mortgage,” Auckland mortgage adviser Mike Whittaker tells me.
When inheritances, or other lump sum windfalls arrive in people’s lives, they tend to apply them first to whatever remains owing on the house, he says.
That makes sense. Removing some of the interest costs on a household is a great investment of cash.
However, Whittaker says many people decide to keep some cash in hand as an emergency fund, and he jokes: “It’s easier to give money to the bank than it is to get it back later”.
It’s a little-known fact that most banks allow people to make smaller lump sum repayments without early repayment charges.
It varies from bank to bank, but BNZ, for example, allows people to pay off 5% of the balance outstanding in any year on any of its fixed rate loans without having to pay any early repayment fees (also known as break fees).
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Perhaps your inheritance would fit into your bank’s break fee-free tolerance.
An alternate method would be to increase your repayments, which most banks allow you to do.
ANZ, for example, lets you increase scheduled repayments by $250-a-week with no early repayment charges, so you can drip-feed some of the inheritance into the loan during the remaining months until it fixes.
You will have to ask your bank what flexibility it has, what your various options are, and what the cost/interest saving of each is most beneficial to you.
If your inheritance is more than the amount your bank allows you to pay off with no early repayment charges, you will probably have to hold onto the remainder of it until the loan comes to the end of its fixed period, which is sometimes referred to it as “maturing”.
Most home loans are fixed for short periods, says Whittaker, and the newly-enriched tend to wait until the fixed periods end, at which point they can pay off the home loan without early repayment charges.
Reserve Bank figures show that is correct.
Around $287 billion is owned on owner-occupied homes. Of that $31b is owned on floating rate loans, which can be repaid with no penalty at any time. And of the $236b owed by owner-occupiers on fixed rate loans, $165b is one year or less away from coming off the fixed period.
Banks may not be especially helpful in helping borrowers plan to pay off their homes loans quickly. They have decent enough information on their websites, but it is an old maxim that banks earn most interest from people who repay their home loans over 30 years than people who repay them over 15.
However, when asked, banks will provide the information borrowers need, and help them work out what to do. People who got their loans through mortgage advisers should call them. That’s what they are there for.
In your case, I suggest having a chat with your bank about how much you can repay, or if you arranged the loan through an adviser, give him or her a call.