Rebuilding Your Equity - Where Do You Start?
The last couple of months are often one of the most expensive times of year for individuals and families. Christmas, school holidays, DIY projects, not to mention those unexpected expenses that just seem to crop up like car repairs, dental work etc. etc.
Often during this time our financial discipline is put on the back burner, and we find ourselves dipping into our loan facilities to ‘make up the difference’ which inevitably erodes our hard earned equity.
As the New Year fades away and the hustle and bustle of the holidays subsides, it is a good opportunity to revisit your financial goals and start implementing some simple tips and tricks to help you rebuild your equity
Here are some of our favourite idea to help you get back on track. We have touched on these in the past but definitely think they are worth revisiting.
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. When you look at these numbers it does add up and can save you a considerable amount of money over time.
Pay sacrifice. For every pay rise you receive increase the repayments on your home loan by that exact amount. 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 your day to day expenses. 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 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.
Passive Income. Take in a boarder or rent a spare room on Airbnb even if it is only for a short period of time. The income you receive can be used towards your home loan repayments and depending on the amount it could reduce the term considerably.
Review your utilities. 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.
In summary, so you can see what a large difference a small amount makes here are some indicative loan repayments:
$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 income and expenses will remain the same for the whole term.
We like to work on an interest that is approx 1-2% higher than what you would currently receive as worst case scenario.
*loan figures are based on a home loan of $200,000.00 @ 6% p.a. interest rate over a 30 year term.