With the RBS rate reduction this week, now is a perfect time to utilise the strategy of paying more than the minimum repayment amount on your home loan. By doing this you could potentially save hundreds of thousands of dollars and pay off your mortgage much faster.
A report by the Reserve Bank of Australia (RBS) states that about half of Australians are ahead on mortgage repayments, so far as that 15% are ahead by 2 years and 40% ahead by a year.
There are many reasons why this could be a great option for you to save money.
Interest is the killer
If you have looked at how your mortgage is structured you will see that you pay loads and loads of money on interest. In fact at the beginning all your repayments simply go towards paying the interest making it hard to make any dent on the principal amount.
The more you pay above and beyond your minimum repayments the more dent you make on your principal and the lower the interest payments are across the loan.
Utilise the rate drops
Whilst for some people the rate drops mean a much needed relief for their household if you can take advantage of the decrease now you will be in a much better position. Even if it means continuing to pay the amount that you were that will put you way ahead and reduce the terms of your mortgage.
Every time there has been a drop over the last year or so, we have continued to pay the same amount we originally were which means our debt is quickly depleting. In the long run it will provide more relief if we can reduce it now.
Paying more means you can increase the equity in your home
Increasing the equity in your home provides you with more financial freedom later on. According to Yahoo finance (2012) equity is the “difference between the current market value of your property and the total balance you still owe on the home loan”. The more equity you have the easier it is to use the money to buy another property, renovate your home or simply improve your lifestyle. Increasing your equity now will lead you to be better off in retirement.
Putting more money on your mortgage reduces your tax
When you have money sitting in a savings account or term deposit you have to pay tax on any money you have earnt from interest. On the otherhand putting money onto your mortgage acquires zero tax meaning you are pocketing more money. Be careful about whether the type of home loan you have allows you to make extra repayments without being penalised.
Change your payment frequency
If you look at a mortgage repayment calculator you will notice that your repayments are higher if done monthly rather than fortnightly. Changing your repayments to fortnightly will reduce the amount of interest you have to pay and the overall amount of your mortgage.
You may want to also look at what benefits you could get from changing your loan at this point of time. All the banks and credit providers are in intense competition for the mortgage market, which when combined with the rate drop may mean you could find a much better deal out there on the interest rate. Make sure you do not suffer from extra fees in changing your home loan.