- January 24, 2018
- Posted by: Ruchir Gulati
- Category: Extra Repayments, Home Loans, Loan Repayment, Money Saving Tips, Mortgage
It’s a great feeling to own a home, but making payments on the mortgage every month for the next many years can be a complete turn-off. Your only wish is to get your home loan paid off as quickly as possible so that you can become debt-free and enjoy full ownership of your property.
Well, that’s just what Extra Mortgage Repayment options are there for. Making extra repayments on your mortgage also helps you save money in the long run and ends the term of your home loan faster. You can always use an extra repayment calculator to help you determine the time and interest you can save over the life of your loan if you make regular additional repayments into your home loan. Believe it or not, the results are overwhelming.
How do Extra Mortgage Repayments Function?
The minimum monthly repayments that you make on your home loan constitutes the amount you borrowed for buying your home and the interest derived from that amount. So, when you make an extra payment towards the minimum amount of your home loan, you are actually paying off the principal, which in turn reduces the interest rate on the entire loan amount.
For example, if your borrowed home loan amounts to $400,000 and the interest accrued is 5.50% every month for a duration of 30 years then your minimum repayment without any extra repayments amounts to $2,271. However, if you decide to make a monthly extra repayment of $200 on your minimum repayment, the increased repayment amounts to $2,471. Upon calculation, this will save you a total of $85,714 on your interest and decrease your loan duration by at least 5 years. Hence, you have more money on hand to spend on other important things and also do not have to wait long for your loan to end. As a matter of fact, even if you make an extra repayment of as little as $100 dollars it will save you a good amount of money for coming years.
How can you make Extra Mortgage Repayments
Extra mortgage repayments can be done in four essentially proven and effective ways, all working to minimise your mortgage debt. The types of extra mortgage repayments you can choose are as follows.
1. Increase the frequency of your repayments
Normally your mortgage repayments occur on a monthly basis. However, to speed up things, you can also choose to make to make fortnightly or weekly repayments, if it suits your budget. For doing so you can speak to your lender and ask to change your repayment frequency according to your comfortability.
Let us take the same example as above, wherein your borrowed home loan amount is $400,000 and the interest accrued is 5.50% every month for a duration of 30 years. In this case, your minimum repayment amounts to $1,047. If you happen to choose to make a fortnightly payment along with an extra repayment of $200 your increased repayment amounts to $1,247.
Hence, upon calculation, this will save you a total of $147,821 on your interest and decrease your loan duration by at least 9 years. This is like paying off 9 years of your loan at once. Other than that you build up your home equity more quickly and save a lot on your interest accrued.
2. Pay a lump sum
Making extra lump sum repayments on your mortgage, especially during the early years can make a huge difference on your total repayments towards the end of the loan term. Again, this will decrease your loan term and give full ownership benefits faster.
For instance, if you make an extra lump sum repayment of $40,000 after 5 years on your home loan of $400,000 for 30 years at a fixed rate of 5.50%, you also cut down on your interest amount by about $97,000 for the duration of your loan. Moreover, you also can also reduce your loan term by almost 5 years.
3. Increase your repayment amount
Another way to reduce the interest on your loan amount is by increasing the amount that you pay on your loan.
For instance, if you are paying a monthly payment of $2456.35 on your loan of $400,000, at a fixed rate of 5.50%, for a duration of 25 years and 5 years into the loan you decide to increase the payment by $500, your minimum amount increases to $2,956.35. This reduces your interest rate by $68,092.34 and your loan duration by a minimum of 5 years.
You can also increase the repayments fortnightly or weekly according to your financial convenience.
4. Create an offset account
If you have an offset account, you are able to reduce the interest on your loan amount by paying off the principal amount with your savings. Your offset account is a savings account that is linked to your mortgage, hence any money deposited here will be deducted from here and interest will only be accrued on the remaining loan amount.
For example, if your loan amount is $400,000 and your offset account has a deposit of $30,000, your loan amount reduces to 370,000 and the interest is accrued from this new amount.
It is a smart choice to save money in your offset account as certain life scenarios might prevent you from making extra repayments or increasing your repayment frequency.
Whichever, extra mortgage repayment option you choose, at the end of it all your goal is to pay more than the minimum requirements on your mortgage, so that you can pay off your loan faster and with least amount of interest levied on your loan.
Work out the savings you could gain by tweaking your repayment options. Taking the assistance of an Extra Repayments Calculator you can easily make calculations on factors that could change your minimum repayments, such as your interest rate and loan term.