How do extra mortgage repayments save you money?
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The answer is quite simple, with extra repayments you can make large reductions in your mortgage saving tens of thousands and years off your loan.
Whether it is a tax refund or some extra money from a payrise, regardless of the amount it can make a dramatic difference.
The extra repayment over and above the minimum repayment amount helps to reduce the principal of the loan quicker. This works by paying into the capital of the loan whereas when a loan repayment is determined the early years you are essentially repaying interest and very small amount of capital.
The quicker you can start reducing the capital of the loan the shorter the length of your mortgage will be.
Let’s use the example of a 25 year loan and a borrowed amount of $250,000 at the current standard variable bank rate of 7.74%. The minimum fortnightly repayments would be approximately $870.
By increasing your repayment by $100 per fortnight ($2600 per year) you can reduce your home loan by 4 years and 1 month saving $53,236. This is assuming you started making the extra $100 per fortnight payment after 5 years of your loan.
If you started your loan with $100 above the minimum mortgage repayment then you would save 6 years and 1 month or $90,147 in the life of loan. An increase to $150 extra per fortnight would save 8 years and $116,983.
If you were only able to add an extra $50 per fortnight to your loan then you would still save an amazing 3 years 6 months and $53,637.
With interest rates starting to fall it is tempting to consider putting more cash in the hand during these hard economic times ahead of us but the extra repayments in the mortgage may just be much more valuable in the long run.
One thing to remember is in most loans you can redraw your extra repayments, often at no additonal cost so you have another way of accessing this forced saving should the need arise.
Source: Infochoice.com.au - Extra Repayment Calculator
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