Making extra mortgage payments is possibly the best way there is of eliminating mortgage debt and saving yourself a heap of money over the life of your mortgage.
The thing that you have to remember when paying off any debt is that it is the interest that accrues which is the thing that cripples most peoples finances.
I’ll use myself as an example so you can see exactly what I mean and just how devastating debt can be.
Mortgage Payment Example
My wife and I are currently looking at buying a new property to live in as our current house is a bit too small to cater for the needs of a growing family. The houses that we are looking at will come to anywhere between $500,000 and $700,000 depending on how close we want to live to the city and how big of a house and land we want to buy.
For the sake of this example – I’ll say that we will get a mortgage of $600,000, which is in the middle of what we are looking at. I have spoken to the loans person at the bank and he has told me that the lowest interest rate I will be able to achieve is 4.80%, which is actually fairly decent for people living in Australia.
So the equation looks like this:
- $600,000 Mortgage
- 4.80% PA Interest Rate
- 30 Years
That will cost:
- $3,147.99 a month for minimum repayments (or $723.18 per week)
- $533,277.17 in interest over the life of the loan
Extra Mortgage Payments
$533,277.17 is a staggering amount of interest to pay on top of the principal amount. However if you can manage to make some extra payments, then the equation looks significantly better.
|Extra Per Week||New Repayment||Interest Saved||Time Saved|
|$25||$748||$43,983||2 Years, 1 Month|
|$50||$773||$80,728||3 Years, 11 Months|
|$100||$823||$138,917||6 Years, 10 Months|
|$250||$973||$246,416||12 Years, 6 Months|
|$500||$1,223||$334,323||17 Years, 5 Months|
|$1,000||$1,723||$408,959||21 Years, 11 Months|
As you can see from the table above, making extra repayments can put a serious dent into the amount of interest you have to pay over the life of a mortgage. Even something as small as $10 or $25 a week is worthwhile, particularly if interest rates go back up again.
Seeing that table and knowing just how difficult it can be to pay off large amounts of debt, is exactly why I never advocate that anyone borrow up to their maximum capacity. The reason for this is that you just don’t have any breathing room and you will not be able to make any extra repayments above the minimum amount.
So there you have it, making extra repayments into your mortgage is one of the single biggest and best ways to save money. So make sure you think about the long term, and find as many ways as possible to scrimp and save so you can avoid paying any more money to the bank than you have to.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net