One of the biggest financial commitments most of us will ever make is the mortgage on our home. So it is no surprise that the potential savings from adopting a smart mortgage strategy can also be remarkable.
Take this example…
Steve and Nicole purchased a home for $500,000 and took out a mortgage of $350,000 repayable over 30 years. With an initial interest rate of 5.50% and monthly repayments, they found they would be paying $365,414 in interest over the period of the mortgage. In fact their first monthly payment of $1,988 would be applied to interest of $1,604 and only $383 to repayment of the capital.
Whilst they realised they had no control over the basic loan of $350,000, Steve and Nicole certainly did have control over the interest they would be paying. In discussion with their finance broker they found:
1. Making fortnightly repayments of $994 (half the monthly payments) would save them almost $72,116 interest over the period of the loan, if all other factors remained the same.
2. Changing their repayments to weekly would only save approximately the same as fortnightly payments.
3. Renegotiating their loan with an interest rate 0.2% less (5.30%) would save them around $15,700.
4. Increasing their monthly payments by just $12 would reduce the term of the loan by six months and save them around $6,900 in interest charges.
Armed with this information, Steve and Nicole set themselves a budget and found they could make the fortnightly payments and save the $72,116 interest.
They are conscious that any increased income from tax savings or salary increases in the future should be applied to the mortgage and reducing the outstanding capital amount as soon as possible.
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