For most Australians, their home loan is the biggest financial commitment they will ever make.
And when you take out a 30-year mortgage, you might think it means repayments for the next three decades.
But that’s just the repayment schedule you agreed to at the beginning. It doesn’t have to be the time you take to become mortgage-free.
A little extra goes a long way
Consider a $750,000 principal and interest home loan over 30 years at an interest rate of 6.39 per cent.
Making the required repayments and adding just $200 extra each month could reduce the loan term by approximately three years and three months. And achieve an interest saving of around $123,256.
That is the power of making small additional repayments early and consistently. You do not have to find thousands of dollars to make a lump sum reduction. Every extra amount on top of your normal monthly payment reduces the principal owing, which saves interest and time.
The fortnightly repayment opportunity
Another simple yet powerful strategy is changing the structure of your repayments.
Using the same $750,000 mortgage at 6.39 per cent, the standard monthly repayment is approximately $4687. Over 30 years, total repayments would be around $1,688,230, including approximately $938,230 in interest.
Instead, pay half the monthly repayment every fortnight; that’s $2343.50. And because there are 26 fortnights in a year, you end up making 13 monthly repayments.
Under this scenario, the loan could be repaid in approximately 24 years and four months. That is a reduction of around five years and eight months, with an estimated $210,612 interest saved.
The important point is that the benefit comes from paying half your monthly repayment every fortnight. Simply asking the bank to change the repayment frequency does not produce the same result.
Put future income to work
There are other opportunities to accelerate your mortgage without dramatically changing your lifestyle.
When you receive a pay rise, direct part of it towards your loan before the entire increase disappears into regular spending. The same principle can apply to bonuses, tax refunds and other extra income.
An offset account can also be valuable. Money held in an eligible offset account generally reduces the loan balance on which interest is calculated, while keeping that money available.
Start with fifty dollars extra per week into your home loan. Then a fortnightly repayment structure while adopting other positive financial habits – you’ll remove years from your mortgage.
