Such a title might look ridiculous in today’s market conditions but you would be the loser to ignore it, especially when you consider how much interest you would be paying in your lifetime to a lender.
A mortgage of $350,000 incurs a total repayment of $838,440 (at an average rate of 7% interest) over 30 years, of which, $488,440 would be interest.
Before you get depressed and put your house on the market, let me explain some of the simple fundamentals, which could see you saving a big chunk of this money.
Some people may offer such advice for a fee, but for Indian Newslink readers I offer it free of cost.
If you were to increase your weekly payment in the above example by $35 per week, your savings would be approximately $100,000 and your repayment term would reduce to 25 years.
The Compounding Magic
The effects of compounding are sometimes considered the Eighth Wonder of the World, for its “magical powers.”
A popular childhood story can be revealed through this example: If you were to choose between having $1 million as a lump sum or be on a daily salary, which would double every day for thirty days, starting with one cent (so that it would be two cents on the second day and four cents on the third day and so on).
If you are unable to work out the answer, I would say that the second option would mean a total of $10 million after 30 days.
Your mortgage payments are subject to compounding effects in reverse since your major banks will calculate your interest on the daily balance. Therefore, if you pay off $100, you will save $7 per year in interest, which will allow you to pay off an additional $7 per year, which in turn would save you $50 per year on interest and so on.
It is hard to commit to higher repayments even though you might understand the impact on the total cost of the loan. There can be situations of higher priority at times, such as losing a job and having a baby
You can have the best of both worlds however by using a revolving credit or floating home loan. These allow you to make regular higher auto-payments and/or transfers into them while keeping the compulsory payments low.
The end effect is the same.
Email: hamish@monline.co.nz
