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FAQ - How do I pay my mortgage off quicker and save interest?

 

Make repayments at a higher rate

 

A good way to get ahead of your mortgage commitments is to pay it off as if you have a higher rate of interest. Get a loan at the lowest interest rate you can and add 2 or 3 points to your repayment amount. So if you have a loan at about 7 percent and pay it off at 10 per cent, you won't even notice if rates go up. Best of all, you'll be paying off your loan quicker and saving yourself a packet.

 

Pay it off quickly

 

Time is money. There are all sorts of strategies for paying less interest on your loan, but most of them boil down to one thing: Pay your loan off as fast as you can. For example, if take out a loan of $300,000 at 7.07 per cent for 25 years, your repayment will be about be about $2,134. This equates to a total repayment of $640,126 over the term of your loan.

If you pay the loan out over 10 years rather than 25, your monthly payment will be $3,494 a month (ouch!). But the total amount you will repay over the term of the loan will be only $419,290 - saving you a whopping $220,836!

 

Make more frequent payments

 

The simple things in life are often the best. One of the simplest and best strategies for reducing the term and cost of your loan (and thus your exposure should interest rates rise) is to make your repayment on a fortnightly rather than monthly basis. How can this make a difference I hear you ask? It works like this:
Split your monthly payment in two and pay every fortnight. You'll hardly feel the difference in terms of your disposable income, but it could make thousands of dollars and years difference over the term of your loan. The reason for this is that there are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 monthly payments every year. And this can make a big difference.

 

Using our example from above, by paying monthly, you will need to repay $640,126 over the term of your loan. By paying fortnightly, you will save $48,534 in interest and 4.5 years off the loan. Zero pain to you, a major benefit to your pocket.

 

Hit the principal early

 

Over the first few years of your mortgage, it may seem that you are only paying interest and the principal isn't reducing at all. Unfortunately, you're probably right, as this is one of the unfortunate effects of compound interest. So you need to try everything you can to get some of the principal repaid early and you'll notice the difference.

Every dollar you put into your mortgage above your repayment amount attacks the capital, which means down the track you'll be paying interest on a smaller amount. Extra lump sums or regular additional repayments will help you cut many years off the term of your loan.

 

Forgo those minor luxuries

 

This is the bit you don't want to read. Once you have a mortgage, your life is likely to be luxury-free (or at least pretty close to it). Think of all the weight you will lose by giving up your favourite indulgent snack. For the sake of your health you should quit smoking and drink less anyway. Take your lunch from home and save on bad fast food. Trust me, your body will thank you for it.

If you're still not convinced consider the following example. A typical day may include a pack of smokes ($10), a coffee and donut ($5), lunch ($12) and a couple of beers after work ($8). That's $35 a day or $175 a week or $750 a month or $9,100 a year.

 

Assuming a mortgage of $300,000 at 7.07 per cent over 25 years, by making $750 in extra repayments each month, you'd save more than $175,000 in interest and be mortgage free 11 and a half years sooner.

No one is saying you should live a convict existence but just cutting down a little on your expenses will see you reap huge financial benefits.

 

Make sure your loan is portable

 

If there is any chance that you will move house during the course of your loan (and let's face it, there is a strong chance), make sure that your lender will allow you to transfer your loan to a new property and that it won't charge you the earth for the privilege.

Be careful. If you sell up and buy a new house, you could find yourself down thousands in discharge costs on your old loan and establishment fees on your new one. By the way your ING Bank home loan is portable!

 

Here’s an interesting Scenario.

 

Loan amount of $250,000 on an interest rate of 7.50% over a 30 Yr loan term has minimum fortnightly repayments of $806.43. Total interest repayments would be $379,012.59 WOW!

 

If the interest rate was 8.00% than minimum repayments would be per fortnight $846.29, total interest would be $410,104.38 WOW AGAIN!

 

That’s an extra $31,091.99 over 30 years in interest repayments alone when comparing the 2 interest rates. OUCH!

 

But here’s an interesting fact, by paying an extra  $14.00 dollars per fortnight from day 1 on the 8.00% interest rate you actually pay the same as if your interest rate was at 7.50% because you would have saved $31,232.76 in interest.

 

So the idea is to look carefully at your mortgage and if you could actually place an extra $20.00 per fortnight onto your mortgage you in-fact are paying less interest on your 8.00% interest rate home loan than the 7.50% interest rate because the interest saved would be $42,880.67!

 

Note: I have based this scenario on 2 separate loans with the same loan amount but different interest rate over a 30yr period on fortnightly repayments.