Paying your mortgage off early
Most first home loans start over a 30 year term as that will afford you the most home for your payments to begin with however it usually doesn’t stay that way as life events and breaks occur that will change it up affecting the mortgage size and term its applied to.
First of all there is no magic bullet or secret formula to paying a mortgage off early, the only way to have an impact on it is to pay down the principle that interest is charged on as a lender will simply charge interest on the outstanding balance as you go along. If you want to save money on interest, you have to pay down principle, it’s that simple.
There are however, a combination of strategies that can be employed along the way to bring that into effect such as -
Structure your mortgage with a portion on revolving credit with your wages paid into it which brings down the total amount on loan saving interest. Essentially an everyday working account you draw back on, its important to ensure the balance each month is reducing so you need to be disciplined to not spend to the available limit, likely an option introduced at the first refix once you get used to having a mortgage, plus it will be on a slightly higher floating rate. The idea is to reduce the outstanding balance interest is charged on with immediate effect saving you interest plus there is no set minimum payment on this portion so your fixed rate loan payments will be less.
As rates decrease, refix with the same payments meaning more goes to principle and save thousands on interest. For example for a $500k loan over 30 years just 0.5 percent will shave around 3 yrs and 4 months off your mortgage if you maintain payments at the original rate and 1% will take 5 years and 8 months off your mortgage with a difference of just $297 mth in payments.
As your income increases, increase the mortgage payments meaning the loan is paid down sooner. A $5k pa pay rise applied to your mortgage at just over 400 mth will save 7 years 5 months off your mortgage and a $10k pa pay rise at $800 mth applied to your mortgage would be 11 years 8 months saving over $200k in interest.
Pay weekly or fortnightly instead of monthly and save on interest. They say to do this but really it’s not huge, for eg paying weekly v’s monthly will save $665 in interest on your 30 year mortgage, it is just .42 cents a week, worth a mention but … meh.
Round your payments up and pay a bit extra, you won’t miss it but it will have an effect on your mortgage. Again, every little bit helps, $100 mth extra is 2 years, 4 mths off your mortgage and $42,600 in interest saved
If you come into some money, even just a tax refund, or manage to save money along the way, smash it off the mortgage at refix time and save. A $10k lump sum applied at refix time can save around 14 months and $9k of interest over the course of the loan. Most banks will allow an additional 5% of the loan balance to be paid during the term of the fixed rate portion without penalties.
In time as your income increases your mortgage becomes a smaller percentage of your income plus as your mortgage reduces and your property value increases you’re developing equity that can be used to enhance your financial position, more on that in a later article.
With further easing in the Official Cash Rate ( OCR ) now at 3.25% from 28th May we’re maintaining a trajectory of easing interest rates, the subject of next week’s blog once banks react in earnest to the latest announcement.
For more on the above and to make enquiries as to what will work best for you in your own situation, click on the contact button below.
