Mortgage Reduction

DO YOU NEED A HAND BUYING YOUR FIRST HOME, AN INVESTMENT, OR EVEN A CAR?

Obtaining a loan is a great way to fast track your life goals. However, you certainly don’t want to be followed by a cloud of debt for the rest of your life.

Most borrowers would like to have their loan paid off and become debt free as soon as possible. After all, mortgage repayments stand as the largest monthly household expense in an average Australian household.

If you’ve just borrowed a sum of money or you are about to borrow, the day that you get the title deed on your property back from your lender may seem a lifetime away. And in most circumstances, it will be. But, you can save thousands of dollars off your loan and pay it faster simply by being smart about your finances and utilising the correct tools that are readily available to you.

Here’s how you can save tens of thousands in your mortgage repayments:

Save on Interest Payment

Interest repayments can be quite daunting, at times it may feel like you are never able to pay off your principal because of the required interest repayment.  However, paying off a mortgage early can literally save you thousands in interest repayments.

Your minimum monthly mortgage repayment for a principal and interest loan is calculated based on how much per month is needed to pay off the balance of the loan or principal over the loan term, plus the interest that has been accrued on that balance.

The average loan terms are about 25 years, however you may have shorter or longer terms upon request. The shorter the loan term, the higher your minimum monthly repayment will be. If you think you can pay out your loan in 10 or 15 years, it’s still a good idea to take the loan over a standard term of 25 years. Just in case things don’t go according to plan, you’ll have more flexibility and your minimum monthly loan repayment will be more affordable and manageable. It doesn’t mean that you will have to take the entire 25 years of the loan term to pay off your loan, but you have that long – should you need it.

Understanding principal and interest

The dollar figure of your loan repayment wouldn’t change if the interest rates didn’t change. What would change, however, is how much of your repayment goes towards paying off the principal and how much is used to service the interest costs.

When you start paying back your mortgage, unfortunately, most of your repayment is actually servicing the interest, while the remainder pays off the principal.

As you pay more and more off the principal, the interest portion of the repayment will be less and the principal portion will be more. As you near the end of your loan term, most of the repayment goes to the principal, while the remainder of the repayment is servicing the interest.

Understand the benefits of extra repayments

  • Putting extra repayments towards a mortgage will not only save you time in paying it off but you will also pay less interest. Extra repayments allow more of your repayment to go towards paying off the loan rather than being dedicated to servicing the interest.
  • For example, if you took a principal and interest loan for $150,000 over a term of 25 years at a 6.50% interest rate. Let’s assume that the interest rate doesn’t change for the term of the loan.
  • If you only pay the minimum monthly repayments and nothing more, on your last repayment (or 300th monthly payment) over 25 years, you would have paid back $150,000 of principal, but also $153,800 of interest as well. That is a very significant amount!
  • If you had managed to pay your loan off in 20 years, you would have paid about $118,400 in interest. That saves you $35,400 in interest costs if you pay off your loan five years faster.
  • If your extra repayments result in paying off the loan in 10 years, your interest repayments drop to about $54,000, which is a difference of nearly $100,000 compared to repaying the loan over 25 years. That’s $100,000 in your pocket!
  • Most variable-rate loans will give you the opportunity to make extra repayments with no extra costs, and will not limit the amount or regularity of extra repayments you can make.

Most people aren't aware they have options