Buying a home is an expensive proposition, not only from the principal of the loan, but the interest it will accumulate over time. Although interest rates are currently a little over 4% in Australia, that still adds up to a lot of money over a 25 or 30 year loan. With median house prices around $500,000 and above you may be looking to save money over the long term.
Here are 3 ways to pay off your mortgage faster.
- Finance or refinance your loan for a shorter term. Options are usually 15, 20, 25, and 30 year loans. The shorter your term, the less interest you will pay overall.Here’s an example: If you take out a $500,000 loan for 25 years at 4.5%, your monthly payments would be $2779, and you would pay $333,748 in interest over the life of the loan. If you took that same loan out for 20 years instead, your monthly payments would increase to $3163 — a difference of only $384. However, you would only pay $259,180 in interest, reducing your overall out-of-pocket costs by $74,568.
- Pay more principal each month. This is a great option if you don’t want to be tied to a higher monthly payment, but still want to pay off your mortgage sooner. Using the same loan example as above for the 25 year term, paying just $100 more per month toward the principal of the loan reduces your overall payments by about $23,000. That’s like saving you over 8 loan payments of $2779. If you increase the extra payment to $300/month, your savings will be over $61,000. Make sure that when you take this route you make clear to the bank that the extra money is to be applied to the principal, not the interest.
- Make a payment every two weeks, instead of once a month. This option also works because you are paying off your principal faster. Using the same 25 year loan as above, you would save $52,216 in interest over the life of the loan. Check if your bank will set up a bi-weekly payment plan. Some banks do this for free, while others charge a fee. It’s important to ask about this when you are setting up your loan, if you think you would like to have that option.
Mortgage Masters are expert mortgage brokers in Newcastle, Maitland and Hunter Valley. Contact us for more information about paying off your mortgage faster.