Making extra repayments on your loan can cut down years off the term of the loan and even save you money on the interest.
Why pay extra?
We all know debt accumulates interest. Simply put – the more money you owe, the more interest you pay. Thus, making extra repayments would not only shorten the loan term but would also lead to saving up on interest. A free and effective way to save money, isn’t it?
Oliver and Zoe, a couple in late twenties, decided to buy a house in a suburb with good connectivity.
Having saved up a deposit of $80,000, they used a mortgage repayment calculator to work out their monthly repayments. They decide to buy an apartment availing a loan of $550,000 over 28 years at a variable rate of 4.79%. However, by searching online, they find a loan with all the desired features at a variable rate of 4.09%. Using our refinancing calculator, they realize that they could save up to $75,246 over the life of the loan by switching over.
Further, simply by increasing their repayment amount by 1/12th every month, they calculate they can save $ 55,799.71 on interest and reduce the loan term by 3 years and 9 months!
How to make extra repayments?
Paying an extra amount regularly towards your home loan can make a big difference in the long run. Here’s how you could easily schedule some extra payments:
#1 Pay off half of your monthly installment every two weeks
While this method will not significantly pinch your monthly budget, it will lead to 13 full repayments instead of 12 over the year. It is worth checking if your lender allows you to adjust your regular payments, as it can save you lots of time and money.
#2 Increase the repayment amount in the first five years
In the first five years of the loan, most of the money you pay is applied towards the interest. Extra repayments during this period are applied towards the principal reducing the actual money that you owe for the house, thus significantly reducing your debt.
#3 Make one additional repayment every year
Another way to cut down your principal is to apply unexpected gains or your annual bonus towards an extra repayment on your mortgage every year. In fact, it would be ingenious to stow away your loose change for a year (trust me, it can add up to a decent amount) and apply it towards an additional repayment annually.
Making extra mortgage repayments regularly can lead to big savings over time. If the thought of being in debt for the next 30 years depresses you, take action now and save yourself the time and money! Use our extra repayment calculator to see how much time and money you can save by making that extra little contribution.