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Frugal and Thriving

Want an extra $100,000? It's easier than you might think

Melissa Goodwin, Frugal and Thriving Updated November 4, 2011, 12:00 am

While earning an extra hundred thousand dollars can take a lot of time and effort, you can easily save big by paying off your mortgage faster using these three painless tips.


Your home is a huge financial investment and if, like most Australians, you take out a mortgage to purchase your home, is an investment that can cost you hundreds of thousands of dollars in interest. So it makes sense to take steps to reduce the amount of interest that you pay. And these steps are so easy, anyone can save thousands of dollars on their home loan.


According to the latest figures from the Australian Finance Group, the average new mortgage last month was around $393,000. That means the average Australian can save over $100,000 by putting into practice these three strategies for paying off the mortgage faster.


1. Compare home loans and save


Getting a lower interest rate on your mortgage doesn't only mean lower monthly repayments, but by shopping around, you could potentially save thousands of dollars.


There is a huge disparity in interest rates between lenders. A quick home loan comparison search will show that disparity between lenders to be over 2%. Not getting the best loan for your circumstances could cost you tens of thousands of dollars over the term of your home loan.


If you’re taking out a new loan, or if you’re looking to refinance, compare lenders to make sure you’re getting the best home loan for you.


2. Make fortnightly repayments on your home loan


By paying your mortgage half monthly rather than monthly, you are making the equivalent of one month’s extra repayment each year, which comes straight off your principle amount.


On a mortgage of $393,000 at 6.79% interest, paid over 25 years, making fortnightly repayments can save you over $86,000 and reduce your loan term by four years.


There’s a trick to watch out for, though. Some lenders calculate your fortnightly repayments by working out the annual repayment amount and dividing it by 26, rather than calculating your monthly repayment and dividing it by 2 (you’ll find that’s how a lot of online calculators work too). Here’s the difference: in the first instance, you will be paying $1,257 per fortnight. By paying half your monthly repayments each fortnight however, you will be paying $1,363.


To reap the savings, make sure your lender calculates your monthly repayments first and then divides this amount by 2 to work out your fortnightly payment amount. This calculator will help you work out how much you could be saving on your home loan by switching to half-monthly repayments.


3. Pay a little extra towards your home loan


Take your savings one step further by paying just a little extra each fortnight. You will make further significant savings on your mortgage, and you won’t even miss that extra paid.


On our $393,000 mortgage, by paying just $30 extra per fortnight towards your home loan (about the price of a family takeaway meal), you can save over one hundred thousand dollars and be out of debt 5 years sooner.


If $30 sounds like too much, just try rounding your payment up to the nearest ten. In our example, even these few dollars can potentially save you over eighty thousand.


Of course, the usual disclaimers apply. These figures are examples only and are based on the assumption that the interest rate stays constant over the course of the loan and you make extra fortnightly repayments from day one of your mortgage. Your savings will vary according to your circumstances.


The key point to keep in mind is that with a few easy changes to the way you pay off your mortgage, you can make significant savings over the term of your loan. The only question is: how are you going to spend your extra $100,000?


Source: Melissa Goodwin, owner and founder of Frugal and Thriving


More from Frugal and Thriving:
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