Mortgages receive a pretty bad rap as a burden upon homeowners. Earlier this year, it was revealed that pre-retirees aged 55-64 were 18 percent more likely to continue working past retirement age for every $100,000 of their mortgage debt, according to research published in the Conversation and carried out by Rachel Ong of Curtin University and her associates.
So, is there any way to make sure that your mortgage is paid off well before you’re leaving the workforce? Of course! Let’s have a look.
Most Australians are making an effort to pay a little extra each month to speed up their repayment. In the June 2017 financial literacy report from ASIC, 53 percent of Australians reported paying some extra money in addition to the minimum amount due each month.
— MoneySmartTeam (@MoneySmartTeam) October 17, 2016
If you can afford to put down a bit of extra cash with each repayment, you can settle your debt sooner and ultimately save on interest costs. To demonstrate, say you’ve borrowed $500,000 at a fixed interest rate of 3.99 percent. To pay this off within the maximum 30 year period, you would need to pay the lender $2,394 each month and by the end, you’d have paid $861,910, according to MoneySmart’s mortgage repayment calculator.
Using MoneySmart’s extra repayment calculator, we can see that the same loan would be paid off in 27 years and 10 months by increasing monthly payments by only $100. This would save you a total of $30,578. If you’re able to pay even more – like an extra $1,000 monthly, this goes down to 17 years with a saving of $170,876!
There are 26 fortnights and 12 months in each year. So, by paying half of a monthly repayment each fortnight, you’ll pay more frequently and end up putting down an extra month’s payment annually. The difference to your account may hardly be noticeable, but you could cut more than four years off the term of your loan.
Using the above hypothetical loan, paying $1,197 fortnightly could see you mortgage-free after 25 years and 11 months and saving $56,769.
While this is much harder to estimate, directing surprise bonuses, happy tax returns or inheritance towards repaying your mortgage can help to reduce your principle, and thusly save on interest in the long term.
Seeing the light at the end of the mortgage tunnel sooner rather than later definitely sounds like a good thing – but there are reasons forking out extra cash on a regular basis might not be the best option for you.
Make sure that if you’re funnelling extra money into your mortgage repayments, it’s not affecting your quality of life.
A savings account linked to your mortgage allows you to save money for future investments or holidays while still helping to reduce the amount you pay in interest. Simply put, with the $500,000 loan mentioned earlier and $25,000 in an offset savings account, you’ll only pay interest on $475,000. According to AMP’s loan offset calculator, this would save $52,452 in interest and reduce the term by a year and nine months.
These savings on interest and time would only increase with regular contributions to your offset account.
Make sure that if you’re funnelling extra money into your mortgage repayments, it’s not affecting your quality of life. A professional financial planner will help you figure out the best way to speed up your mortgage without costing you any enjoyment. Here at Invest Blue, we want to help you overcome your debts and achieve total financial freedom – contact us to discuss financial strategies today.