Mortgage is usually the largest and longest running debt ordinary people like you and me have in their life. But how many of us treat it in a manner: “get the home loan, set up regular automatic payments and forget about it”?
This is a big mistake!
Let’s say you have a mortgage $400,000 for 25 years at 6.00% p.a. interest rate. Do you know how much interest on top of the loan amount will you pay during the entire mortgage term?
Here is a quick calculation:
If you are making monthly repayments, the total amount of interest paid for this loan is $373,161. Yes, that’s almost as much as you originally borrowed! In total you will be paying your bank $773,161.
Now, let’s make a small adjustment…
We change the yearly interest rate from 6% to 7% and see what happens. The interest amount will increase to $448,135. Yes, now you will be paying more on interest than principal!
As you can see, even very tiny changes to the loan parameters will make huge difference in terms of the amount of money you pay to your bank. In our example increasing the interest rate by just 1% meant the total interest paid over the mortgage term increased by whooping $74,973!
That’s why it is very important to actively manage your mortgage. “Set it up and forget” mentality can, in fact, be the most costly mistake you ever make.
3 Easy to Execute Tips for Mortgage Management
In this article I will share with you three easy to perform steps that can save you tens, maybe thousands of dollars on your mortgage.
How many more overseas holidays, new cars or your kids college funds would $100,000 pay?
So let’s have a look at these tips:
Tip #1: Changing from Monthly Repayments to Fortnightly or Weekly Payments
In our above mentioned hypothetical scenario with Loan $400,000 for 25 years at 7% p.a. interest rate, changing to weekly repayments would save you $1,984 (assuming your bank would keep monthly interest compounding frequency).
Off course it’s not a huge amount, but it’s basically free money. You were able to save almost two thousands of dollars by simply changing the payment frequency.
If your bank uses daily interest compounding then the effect of this would be even higher.
What you need to do:
Go to your bank today and change the repayment frequency.
Just make sure that you have available cash-flow to do so. You don’t want to run into situation when your payday is weeks away and you have no money in your bank account.
If you are paid weekly, this shouldn’t be an issue. If you are paid monthly or fortnightly then do some checks beforehand.
Now let’s have a look at some other easy to follow tips that will save you even more…
Tip #2: Paying Some Extra Dollars with Every Repayment
In our scenario if you decide to pay just extra $20 every month then you can save $10,069 dollars. Yes, for less than a $5 a week you saved more than ten thousands of dollars!
These extra $20 went directly against your principal, reducing the loan balance and hence lowering total interest paid. It will also mean that you’ll pay your mortgage approximately 5 months earlier.
What you need to do:
Set up your mortgage for your desired period (so that you have the flexibility of lower payments in case you can’t put any extra money against it in some months).
But make a commitment to put some extra money against it with each payment. However, make sure that your bank allows you to do so. And also your bank should not be placing any limits on additional repayments.
Sometime they tend to say that any extra payment has to be a minimum of $500 or similar amount. Negotiate your mortgage Terms and Conditions so that it does not contain any such clauses.
Tip #3 Get Aggressive Regarding Interest Rate & Shop Around
At the beginning of this article I already showed you how even small interest rate changes can have a big impact on the total interest amount you pay.
Getting interest rate cut by a whole one percentage point may not be realistic. However, getting 0.1% or 0.2% rate can is achievable.
In our example, if you were able to cut your interest rate from 7% to 6.9%, this would save you $7,725 over the whole loan term. Cutting it down to 6.8% would bring savings of $15,331!
Is this worth some trying? Of course, it is!
What you need to do:
Don’t be afraid approaching your bank and squeeze them a bit. Be uncompromising; insist on your interest rate reduction. Mention your good repayment history or tell them that their competitors are pitching you and you are considering their offers.
Don’t be shy, don’t be afraid to ask.
I am sure that the 5 or 10 minutes of your conversation is worth all the potential saving. It may be the best earning 5 minutes in your life!
Our Tool to Help You Calculate Potential Savings
We have developed a great calculator in Excel that should help you to analyze and model your mortgage. Unlike most other loan or mortgage calculators, this one contains many features to show impact of various changes to your loan.
To download Free version of our Loan Amortization Schedule Calculator: click here
This Free version is limited to only 30 Repayments, but in other aspects is fully functional.
Premium versions allows for up to 3000 Repayments. That’s enough for more than 57 years of Loan Term based on weekly payments. This should cover any type of mortgage.
To buy Premium version of the Calculator: click here
Some of the handy functions of this calculator include:
- possibility to choose daily, weekly, fortnightly or monthly repayment and interest compounding frequencies
- choosing own repayment amounts (loan term is then automatically adjusted)
- change repayment dates (in case you paid your loan late)
- change repayment amounts for each period
- add extra payments for each period and so on
You can find more detailed description of this mortgage calculator and instruction on how to use it in this article: Excel Amortization Schedule Calculator for Loan Repayments
We hope that you will enjoy our Calculator and that it will help you to save heaps of money on interest payments!
If you have any suggestions how can we improve it or adjust to your needs then we would love to hear from you. Please leave a comment below or contact us via our online form. Thank you!