Your mortgage is probably the biggest debt you’ll ever owe, and the fact that you’ll be paying it off for the next 25 years or more can be daunting, as can the total amount of money you’ll end up spending. Did you know that a $600,000 mortgage, repaid fortnightly over 25 years at a consistent rate of 6% will cost you more than the entire loan value in interest?
The great news is that there are plenty of ways you can pay off your mortgage faster, cutting years off the term and saving yourself thousands of dollars. If you want to be mortgage-free sooner, consider whether some of these solutions could work for you.
Switch to fortnightly payments
If you’re paying monthly, and switch to paying half of your monthly payment each fortnight, you’ll actually end up repaying more of your loan each year. This is because there are 26 fortnights in a year, so by instigating this change, you’re effectively making an extra payment each year. The long- term effect of this is dramatic. If you repay that $600,000 loan in fortnightly instalments of $1800 instead of monthly payments of $3600, you’ll reduce the term by five and a half years and knock almost $150,000 off the total amount you pay.
Increase your regular repayments
If you’ve got a bit of wiggle room in your budget, then putting some of the extra money towards your regular loan repayments will make a big difference. If you’re paying off the $600,000 loan over 30 years at the minimum fortnightly payment of $1660, then adding an extra $50 will take more than two years off the term and save you over $63,000. Bump that up to $100 extra a fortnight, and you’re looking at more than four years off the term and almost $115,000 in savings.
Make lump-sum payments
If you manage to save a lump sum, or you receive an inheritance or bonus payout, consider paying it off your mortgage. For example, if that $600,000 loan is at a five-year fixed rate, then once the fixed rate expires (which you should wait for, to avoid paying penalties) paying a lump sum of $50,000 would take four years and almost $145,000 off of the total cost of the loan.
Choose a shorter term
Just because you can opt to pay your mortgage over 30 years doesn’t mean you have to. If you can afford to make higher payments, a shorter term will save you thousands in interest. Again, using a $600,000 mortgage at 6% paid fortnightly as an example, choosing a 25-year term will save you about $135,000, and a 20-year term will save you about $263,000.
Don’t pocket the interest rate drops
While it’s nice to have a bit of extra money in your pockets if your interest rate goes down, keeping your repayments the same as they were at the higher interest rate means every cent of the difference is whittling away the loan principal that you owe. Since the interest is charged each payment period on the outstanding principal balance, you’ll start paying less interest right away. Although it might seem like a tiny drop in the ocean, even the smallest contribution over the minimum repayment amount will have you heading for mortgage freedom that much faster. A few small sacrifices now will reap big rewards in the future, and help to set you up for a prosperous future.
At Best Mortgages, we can assist you with the mortgage process and help you with the process of saving on your mortgage. Contact us for your no obligation and free service with unbiased mortgage advice.