What are the Benefits of Extra Repayments Towards Your Mortgage?

What are the Benefits of Extra Repayments Towards Your Mortgage?
  • Opening Intro -

    The keys to that long coveted dream house are finally here – finally a property that one can 'own’ for oneself beyond the labors of rentals, contract renewals and shifting year after year!

    Wonderful, but that 25 year mortgage weighs too much on the mind? If so, then you are not the only one.

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Smash Your Home loan bit by bit

There are thousands of people out there, staring at a long tenure mortgage – the single largest financial obligation in our lifetime, and the largest portfolio of debt in any developed country.

But do you need to continue with this debt running for decades? No. There is no magic wand that gives a short term quick solution. But the answer lies in inching towards your vision bit by bit. A little bit of extra repayment every month goes a long way in reducing the tenure of your loan. But surprisingly most people are ignorant of this as they look at the huge loan amount, the large monthly installment due, compared to which $100 looks trifling indeed! Right? Wrong, for this extra $100 is powerful indeed if looked at over years. Let us get into the details

Why is it helpful to start with a long tenure loan?

Even if you have the financial capability to pay off a loan in say 10 or 15 years, it is always advisable to start with a long tenure. Remember, longer the tenure, smaller the monthly payments; this gives you the flexibility to be prepared for other requirements or contingencies of life. That said, if your finances are smooth, start repaying extra every month, as much as is feasible.

Why repay extra?

The way a loan works, the larger part of your installment goes off in paying the bank’s interest in the initial years. Only in the later years does the instalment pay off the principal (or the actual value) of your loan. Any additional repayment however, chips off the principal immediately which means that you are not liable to pay the bank interest for that bit of your repaid principal. This automatically reduces your liability to the bank (lesser principal and hence lesser interest) which means even if you keep paying your monthly installment, you can repay the loan in lesser number of months.

view fast mortgage pay-down strategies

Confused? Let’s look at the numbers

Let’s assume you have a loan of $300,000 for 25 years at a rate of 5%. Your monthly installment stands at $ 1,754. Now, if you pay back even $100 every month, you repay your loan 2.5 years earlier. Not good enough? In this process, you also end up saving a whopping interest of $26,000 paid otherwise to the bank!

Let’s stretch our budget a bit now. If you pay $500 additionally every month, then you end up prepaying your loan nearly 9 years in advance, besides saving $88,000 out of your own pocket (otherwise paid as interest to bank).

Check this website from the ING bank for greater details and to play with the various possibilities: https://www.ingdirect.com.au/home-loans/calculators/extra-loan-repayments.html

The finer details

One more additional fact you should consider is the kind of loan you have – if it is a variable rate loan, then no worries. However, if you do have a fixed rate loan, talk to your bank to know your prepayment limit as the bank might charge you extra if you cross the additional repayment threshold every year.

Now, go ahead – check your budget and see how much can you actually save per month. Do you really need that extra coffee in the evening? Remember, every penny counts! Now, calculate how much can you repay additionally without of course inconveniencing yourself and your family. And you will end up saving for yourself – interest payments to the bank as well as the time period for your loan. And yes, don’t forget to share this with your friends and relatives – who might also be staring at a long loan and wondering when can they redeem themselves of their obligation!

Money Management reference:

managing your mortgage payment

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Categories: Home Financing

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