Pay extra into your mortgage and find the sacrifice may be worth it in the long run.
Getting something for nothing is rare, but sometimes it is possible to get a great deal for a relatively modest sacrifice.
This is certainly the case when it comes to cutting your mortgage. What’s more, if you make a bit of an effort the cut can become a significant slash. The reasons are simple enough. Even a small personal sacrifice, repeated each week or each month, will result in savings that can be used directly to reduce the size of your home loan.
Somewhat less obvious is that by taking this action, more of each month’s mortgage repayment will go to actually reducing the amount you owe rather than being swallowed up in paying interest to the bank or other lender.
More importantly, just as an investors wealth accelerates as reinvested interest compounds on itself, a home buyer’s debt reduction accelerates as less and less of their regular repayments are taken up with interest. The end result is that your mortgage is paid off sooner — often a lot sooner — and in the process significant savings can be generated in the form of interest you haven’t had to pay.
Andrew Willink, head of research group Cannex, says the key is to get in early and cut the amount you owe while maintaining, or even increasing, your repayments. “If you start early, even a fairly modest extra amount paid every month can save you more than $100,000 in repayments on an average mortgage,” he says.
While Willink acknowledges loans have undergone radical cosmetic surgery since the market deregulated in the ’80s, he says they still work on the same principles. That is, interest is calculated on the daily balance and charged monthly in arrears. The more often you throw money into your mortgage, the more interest you save.
Denis Orrock, head of banking research group InfoChoice, says a range of other steps can also generate big savings on your mortgage. “It is important to be aware of these when you first think about getting a loan.”
To start with, borrowers need to understand that they should negotiate with lenders and not just accept the first set of loan terms they offer. Then there’s the need to avoid the mortgage traps, some of which result in higher repayments than necessary. And remember, there are many different types of home loans on offer. Depending on your circumstances, some can generate significant savings.
Nor should those with existing loans ignore these opportunities. As Orrock explains, depending on your circumstances, it could be possible to refinance into a mortgage that will save you much more than the cost of refinancing.
The aim, as always, is to try to manage your mortgage in the smartest way possible and getting the right loan is an important part of the equation. Yet in the end, slashing your mortgage depends on your priorities. The more committed you are to getting the home loan burden off your back, the more effort you’re likely to make to find ways of achieving that goal as soon as possible.
Peter Thornhill, head of Motivated Money, says the main challenge centres on making some sacrifices now in the name of achieving financial security and more lifestyle options in the future.
“Whether it is paying off your mortgage or investing more, the only way you will succeed is by making it one of your priorities,” he says.
That doing so is worth the effort, is clear from the figures. Take the case of a couple with a $200,000 mortgage with an interest rate of 8.5% being repaid monthly over 25 years.
With monthly repayments of $1610, they would end up paying a total of $483,000 by the time the loan was repaid.
If they were able to repay $10,000 at the start of the loan term (perhaps by trading down to a cheaper car) and boost their monthly repayment to $1700 month, the loan would be repaid in approximately 18 years.
Also, instead of paying a total of $483,000, their repayments are slashed to $378,000. After allowing for the initial $10,000 repayment, this produces a net saving of $95,000 — an excellent result in anyone’s language.
From Money Magazine
By Peter Freeman and Effie Zahos
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