Do you want to Own your home Sooner
Let's get back to basics
Every home owner should be giving the highest priority to paying off their home loan as quickly as they possibly can, the sooner you can pay your home off, the sooner you can use the equity in your home to leverage other types of income producing investments. Any extra payments you receive should be put into your loan, such as tax cheques pay rises, or any bonuses.
Description
To put this into a practical sense, you may inherit some money let's say $10,000 instead of buying a new car, going on that holiday or trying to make your fortune at the casino. You put that money against your home loan it will significantly shorten the term of your loan.
How
Now if you have a loan of $200,000 at 7.07% over 25 years and you make fortnightly repayments, then you put that inheritance of $10,000 into your loan after 10 years you will have saved $17,277 andown your home 1 year and 6 months earlier. It's even better if you make lump sum payments earlier, If you pay $10,000 into your loan after 5 years, you'll save $27,957 And own you home 2 years and 2 months earlier.
Better still if after 2 years of the loan you pay $10,000 into your loan you'll save 2 years and 8 months of your loan term and a whopping $36,105 Of interest that you would have been paid to your lender, it's much better in your pocket.
Don't get any loan, Get the right loan!
To understand a mortgage you must know that the interest you pay is calculated on the principal amount of your loan, the daily loan balance. Therefore if your daily loan balance reduces because you have made a lump sum payment the interest can't accumulate as quickly, simple isn't it! But not all loans allow you to make extra payments, some, fixed and many special low rate loans don't let you do this, so be careful when choosing a loan. A low interest rate may sound great at first butdon't be misled, the more flexible a loan is the better it is and will allow you to pay your loan off sooner.
Get it right
We will look at another scenario for those of you who are not fortunate enough to receive a lump sum amount to put into your loan.
Let's assume that you are able to fine tune your budget and find a little extra money each month, youshould try to make regular extra repayments against your loan. Let's say you can afford another $100 per month and your loan is again $200,000 with an interest rate of 7.07% for 25 years and you are 1 year into your loan, your minimum monthly repayment should be $1,422 a month. If you pay that extra $100 that you were able to budget for each month against your loan on top of your minimummonthly repayment you will save $37,383 in interest and pay your loan off 3 years and 7 months earlier.
Do You want to Own Your Home Sooner?
If that extra repayment is increased to $200 a month, you will now save $62,730 in interest and own your home 6 years and 2 months earlier. As you can see you don't have to do a lot to save yourself thousands of dollars, just increase your regular repayment to whatever you can comfortably afford. The faster you pay your home loan the more money you will have available for other income producing assets (such as that next rental property)
What are you waiting for.
by Michael Capogreco | Managing Director | Acquired Home Loans |
