Your mortgage is probably the biggest debt you will ever have and the accumulated interest cost over your lifetime is huge – in the hundreds of thousands. Naturally, you’ll be keen to reduce or repay the debt as soon as possible. Fortunately, with a little bit of work, you can have a big impact on the term of your mortgage.
Let’s have a look at a mortgage of $350,000 with an average interest rate of 7%.
If the mortgage is paid off at $537 per week it would take 30 years, and the cost of interest would total $488,381. It’s a large sum of money, isn’t it? Of course, over this time your home should increase in value but wouldn’t it be nice to lower this cost and pay off the loan sooner?
Let’s have a look at the cost after we increase our weekly payments:
How increased weekly payments reduce the cost of interest *
How increased weekly payments reduce the term *
* These results are for a mortgage of $350,000 at 7% p.a. with weekly payments of $20, $40 and $60 over and above the original $537 per week.
It’s easy enough to talk about extra payments but in reality it is hard to commit to them when there are bills to pay and kids to feed. And we are all susceptible to sudden cuts in income and changes in interest rates.
You can, however, structure your home loan so these extra mortgage payments are optional from week to week, so you can redraw them in case of emergency. Changing your payment frequency and combining your bank accounts into the home loan can also reduce the interest cost.
We look at several things before deciding how you can achieve all this without increasing the minimum home loan repayment. The main things which help us decide how the mortgage should be structured are:
- Your personal discipline levels when it comes to your money
- Your budget, income, expenses etc
- Future plans, children, renovations etc