The questions and original answers

For a contractor with a mortgage in New Zealand, I’d think about extra repayments as a balance between reducing your mortgage and protecting your cash flow.

Your income may be strong in busy months but unpredictable across the year. That means money you put into your mortgage needs to be money you genuinely won't need to cover a quiet period, a tax bill, or an unexpected expense.

The key principle is: build flexibility first, then use your surplus to reduce the loan. You don't necessarily need to make the same extra repayment every month.

1. Give your money three jobs

1. Your income buffer

Keep enough accessible cash to cover essential personal costs, mortgage payments and business expenses during a quiet spell. For a contractor, a starting target might be 3–6 months of essential outgoings, potentially more if contracts are irregular or you have dependants.

2. Your tax and business reserves

Keep GST, income tax, provisional tax and upcoming business costs separate from your spending money, as applicable to your business structure. Don't count these funds as available for mortgage overpayments.

3. Your mortgage surplus

Once the first two buckets are adequately funded, direct some or all of the genuine surplus towards your mortgage, while keeping enough liquidity for upcoming expenses and known large bills.

2. Choose a mortgage structure that suits variable income

In New Zealand, your mortgage structure can make a real difference to how safely you can make extra repayments.

Option A: Keep your mortgage fixed and make permitted extra repayments

Good if you value predictable repayments. Check your lender's annual extra-payment limits and any early repayment charges before making a lump sum. You could make additional payments during busy months within those limits.

Option B: Use an offset mortgage

Your eligible savings remain accessible in linked accounts while reducing the balance on which mortgage interest is calculated. This can be particularly useful when you want to keep a substantial cash buffer. Compare the offset rate with your current mortgage rate. Offset home loan | Home loansTotalMoney home loans - Offset mortgages

Option C: Use a revolving-credit facility

This works somewhat like a mortgage overdraft: income paid in reduces the amount you owe, and you can draw money back up to your approved limit. It offers flexibility for irregular income, but the floating interest rate can be higher, and discipline is essential. Types of mortgages in New Zealand, and how to choose » SortedRevolving home loan | Home loans

A split loan may also work well: keep most of the mortgage fixed for rate certainty and put a smaller portion into an offset or revolving facility for flexibility.

3. Have a rule for every busy month

Rather than deciding how much to pay off based on how flush you feel, use a repeatable process.

1. Set aside tax, GST and business costs.
2. Top up your cash buffer if it has fallen below your target.
3. Cover upcoming mortgage payments and known expenses.
4. Put the remaining surplus towards the mortgage, preferably using a structure that preserves access to your buffer.

For example, suppose you have an unusually strong month and $8,000 left after business costs and tax provisions. If your cash buffer is already sufficient, you might use some or all of that $8,000 to reduce mortgage interest. If the buffer is underfunded, keeping the money accessible may be the wiser choice.

One important distinction: paying down your mortgage and keeping cash in an offset account can have similar interest-saving effects, but they don't provide the same access to your money. With a standard mortgage, extra repayments may be difficult or costly to recover. With an offset account, eligible savings generally remain available; with revolving credit, access depends on your approved limit and facility terms.

4. Work out whether extra repayments are worthwhile

A useful starting point is to compare the effective mortgage interest saved with the return you would earn by keeping the money elsewhere.

For example, if an extra $10,000 reduces mortgage interest at 5.5% per year, it saves approximately $550 in interest over a full year, assuming the balance and rate stay unchanged.

But that $10,000 might be more valuable as a cash reserve if it helps you cover several months without income. Avoiding missed repayments, expensive borrowing or forced asset sales can be worth more than the interest saving.

Let's tailor this to your situation

I can help you work out a sensible buffer and a repayment strategy using a few rough numbers. Exact figures aren't necessary.

My initial inclination is to prioritise a robust cash buffer and investigate an offset facility before committing large lump sums to a standard fixed mortgage. That way, your money can reduce interest while remaining available when contracting income dips—provided the facility's rate, fees and terms make sense for you.