A Little Bit Goes A Long Way
There are all sorts of ideas and actions you can put in place to help reduce the loan term on your home loan. The simplest way is to increase your repayments to reduce your mortgage term which ultimately means you save money by paying less interest. But something generally needs to be sacrificed for this to happen.
The coffee principle.
A popular thought is that increasing your mortgage repayments by an extra $4 per day (one cup of coffee) can save you a total of approximately $56,000.00 in interest* . This will reduce your loan term from 30 years to 24 years. The sacrifice in this case is obviously that cup of coffee. For me, that’s “not my cup of tea”. I’m not about to give up my coffee. But when you look at these numbers it does add up and can save you a considerable amount of money over time. So how else can this be achieved?
The coffee addicts alternative #1
Here is my favourite. Every pay rise you receive can be used to increase the repayments on your home loan. I don’t know many people that can tell me what they do with their pay rises. They just seem to get swallowed up in the day to day expenses with nothing to show for it. So let’s do something with it. For example. If you receive a 3% pay rise and are currently on a wage of $45,000.00 p.a. After tax, this would equate to an approximately an extra $21 per week. If you increased your home loan repayments by $21 per week this would reduce your loan term by five years saving your approximately $45,000.00 in interest. Imagine if you could do this each year you received a pay rise. What a difference it would make. In the second year with the same 3% increase the loan term would reduce to 22 years saving approximately $76,000.00. You can do all of this while still maintaining your daily coffee intake.
The coffee addicts alternative #2
Another option could be to change phone, power or general insurance providers. This is relatively common especially with websites specifically set up to do this. These savings you make can be used to increase your home loan repayments accordingly.
Here are some indicative loan repayments that show by increasing your repayments slightly it can make a big difference:
$200,000.00 @ 6% p.a. over 30 yrs = $276.21 p/wk
$200,000.00 @ 6% p.a. over 25 yrs = $296.78 p/wk (extra $20.57 p/wk)
$200,000.00 @ 6% p.a. over 20 yrs = $329.95 p/wk (extra $53.74 p/wk)
$200,000.00 @ 6% p.a. over 15 yrs = $388.56 p/wk (extra $112.35 p/wk)
$200,000.00 @ 6% p.a. over 10 yrs = $511.10 p/wk (extra $234.89 p/wk)
Please note the following assumptions are made in the calculations above. The interest rate (6% p.a.) and the inflation rate (2% p.a.) will remain the same for the whole term. Income and expenses will remain the same for the whole term.
This information does not replace specialist advice on how to structure your lending but every little bit helps!
For specialist advice for your circumstances contact Brent or Jackie 0800 334 338
*loan figures are based on a home loan of $200,000.00 @ 6% p.a. interest rate over a 30 year term.