How to own your home earlier

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…

Our clients, Steve and Nicole purchased a home for $600,000 with a mortgage of $450,000 repayable over 30 years. With an initial interest rate of 5.25% and monthly repayments, they found they would be paying $453,378 in interest over the period of the mortgage. In fact their first monthly payment of $2,509 would be applied to interest of $1,969 and only $540 to repayment of the capital.

Whilst they realised they had no control over the amount borrowed, the couple did have control over the interest they would be paying. We explained:

1. Making fortnightly repayments of $1,255 (half the monthly payments) would save them almost $82,000 interest over the period of the loan, if all other factors remained the same.

2. Renegotiating their loan with an interest rate 0.25% less (5.00%) would save them around $25,184 over 30 years.

3. Increasing their monthly payments by only $41 would reduce the term of the loan by 14 months and save them around $20,399 in interest charges.

Or alternatively…

In the current low interest rate environment additional repayments will only achieve small savings in interest. Rather than make additional mortgage repayments, we explained to Steve and Nicole that they could maintain their existing repayments and invest excess funds in higher yielding assets such as shares. However, we clarified the higher level of risk involved in such investments.

Armed with this information, Steve and Nicole decided to play it safe. They changed their payment schedule to fortnightly and plan to apply any increased income from tax savings or salary increases in the future to the mortgage, reducing the outstanding capital amount as soon as possible.