Smartest Mortgage Broker on the Planet
Phone: 08 9439 2820

PAYING YOUR LOAN OFF FASTER

To understand how to pay your loan off faster, you need to know how a loan works. A simple explanation is as follows

A borrower borrows $500,000 at an interest rate of 5.5% per annum for 25 years. The ‘principal’ is the amount you borrowed.  The ‘interest’ is the amount you are charged for borrowing the money. The ‘loan term’ is how long the loan contract is for.

On almost all home mortgages, interest is calculated daily, but added to the loan balance at the end of the month.  Loan repayments are either ‘interest only’ (IO), or principal and interest’ (P&I).

Most home mortgages in Australia are by default ‘principal and interest’.  P&I loans mean that the repayment is calculated to repay the loan in full by the end of the loan term.  The P&I repayment is made up of two portions, one being the ‘interest’ charged for the month, and the other portion being an amount which pays back the ‘principal’.  By the end of the ‘loan term’, the principal is paid off completely.

If you choose ‘interest only’ repayments, your repayment will match exactly the interest you have been charged, and there is no amount being repaid on the ‘principal’  That means that unless you sell the house or switch to a P&I loan, you’ll never get rid of the mortgage and you’ll be paying interest forever.

You should always choose to repay by ‘principal and interest’ rather than ‘interest only’, unless your accountant advises otherwise.

They key in repaying your loan faster is to reduce the ‘principal’ as fast as you can by making‘extra payments’. These are payments above the set minimum repayments.

Every extra dollar you put into your loan should save you around $2 over the term or the loan. If you struggle to make regular ‘extra payments’, even a one-off lump sum deposit, such as a tax refund, can have a positive effect. A lump sum payment of, say, $1500 in the third year of a $200,000 home loan at 7.5% could cut your loan by five months and save you more than $6,000 in interest.

Another simple strategy is to pay say $100 extra per month.  It is a simple strategy that can save you thousands. On a $400,000 loan over 30 years at an average interest rate of 5.5% pa you will reduce interest payments by almost $48,326, they will cut the term by 2 years and 11 months!!

Posted in
Avatar

Peter Butler

Passionate with serial ‘hobbiest’ tendencies. Love WordPress & software 'toys'. Raving 70's Jap Bike collector. By day we convert dead dormant websites into profitable sites, hence ‘Smarter Websites’ - making them 'work', one at a time if necessary. On target for world domination, albeit our part of the world...

Reader Interactions

YOUR CONTACT DETAILS

P: 08 9439 2820
F: 08 9419 1186
11 Leasham Way, Medina, WA, 6167

ABOUT YOU

About Us Hi, I'm {Your Name}. I'm the {Whatever Your Title Is} of {Your Company Name}. I love, live and work here in {Where You Live}. Our {Conversational Version Of Your Catch Cry Or USP}. You can read what some of our , and the most {recent client raves here}. (you can even see some of them)

MY ARCHIVES

Call Now Button