I recently wrote about How To Pay Off Your Mortgage Faster and I’ve received many positive comments from my readers. In today’s article I’d like to expand a little more on one of the points from that article.
I’ve had a couple of client meetings over the past couple of weeks where we’ve looked at how they could repay their debt more effectively. One of the things I’ll always suggest is whether they can make extra repayments on a regular basis.
Let’s take a look at how this could work.
For this case study, let’s look at a loan of $300,000 being repaid over 25 years at a rate of 5%.
To repay this loan over 25 years you’d need to make a monthly repayment of $1,753.77. Over the life of the loan you’d make total payments of $526,131 – this is $300,000 of principal (i.e. the amount you’d borrowed) and the remaining $226,131 is the amount of interest you’d pay over the 25 year period.
So what if you could make a higher monthly payment?
An extra $100 per month drops the overall interest cost by $26,005 and means you pay off the loan 30 months earlier. That’s pretty impressive for only $100 per month.
What about an extra $200 per month?
This is where it gets interesting because of how compound interest works.
An extra $200 per month saves you $46,352 in interest and you repay the loan 54 months earlier.
How would you feel if you could repay your loan 54 months earlier – that’s 4 1/2 years earlier just by finding an extra $200 per month.
Take a look at the image below to see the savings.
So could you do this?
Most people could find an extra $200 per month if it meant they could shave four years off their loan.
Now, this example is not perfect. Your home loan is probably not for exactly $300,000 and for 25 years. But the idea is the same – making extra repayments, no matter how small they may be – will take time off your home loan.
So take time out today to think about how this applies to you.