Many of us at some point in our lives are going to take out a mortgage for our own home. This mortgage might be for an apartment or condominium or a stand alone house. Whichever one it will be it is likely to be at a high cost. The price we pay for our home will depend on our financial situation, our credit history, the type of home we want to have, and how much the bank is willing to lend.
Mortgages are usually taken out for thirty or forty years. Though they can also be taken out for much shorter periods like twenty, fifteen or even ten years, in these situations the minimum repayment is much higher. The longer your loan term, the lower the repayment will be. However, just because you have a low repayment doesn’t mean you should stick to it, paying a little bit extra each fortnight or month can have huge affects on the amount of interest you pay and save.
Every extra repayment you make will save you on interest over the life of your loan. Even $10 extra each month is thousands saved over the life of your loan. The larger and regular the extra repayment you make the larger the savings will be for you. So what can you do to pay your mortgage off in under 10 years instead of 30. It’s easy.
1 – Set up your loan so that you are paying every fortnight instead of every month. There are 26 fortnights but only 12 months which means that each year you will make one extra repayment on your loan. If your loan is for $100,000 at 5% interest your monthly repayments over thirty years are going to be about $540 per month with interest payment of over $93,000. The same loan but with repayments made every fortnight $240 per fortnight and save about $200 in interest.
2 – Make extra repayments every month. $10 extra each month from the first repayment will save you almost $10,000 over the life of your loan and reduce your loan by 2.5 years. An extra $100 with each repayment if you pay per fortnight will save you almost $50,000 in interest and reduce your loan period by almost 14 years. That’s a huge difference with a small amount. Anyone can find an extra twenty dollars a month. If you have the option try to find more. The more extra repayments you make the more savings you’ll make and the shorter your loan term will be.
3 – Make lump sum repayments when you get a bonus, tax return or money gift. Lump sum repayments automatically lower your mortgage balance and reduce the amount of interest you have to pay. A $5000 lump sum in year 1 of your loan will save you about $15,000 in interest and take 3 years off your loan. That same amount in year 5 will save you just over $11,000 in interest and cut 2.5 years of your loan.
4 – When interest rates go down, don’t reduce your repayments. Keep them at the same level as if the interest rate was the same plus add your extra repayment to have a larger impact on your loan length and cost. This way if interest rates eventually go up you won’t feel the difference and will be ahead on your loan repayments.
The best thing to do is use a combination of these strategies to reduce the length of your loan to under ten years. The quicker you pay off your mortgage the less money it will cost you and the quicker you can get on with your life and spending money on things you want without having to worry about a mortgage. Make extra repayments every fortnight or month to save anywhere from 2 – 10 years off your mortgage, make lump sum repayments when bonuses or tax returns come through and save thousands in interest. It really is possible to pay off your mortgage in under 10 years without putting a huge dint in your pocket. An extra few hundred dollars each month is all it takes.