Tuesday, 17 April 2012

Making Extra Loan Repayments

It may seem obvious to some, but I still do not think people realise the importance of making extra repayments when they do have a loan. I guess they do not see the real benefits of doing this, I guess they are just satisfied with making the minimum repayments.

Take my brother for example, we purchase a house together a couple years ago, and while we are still paying off the loan, he does not see a problem with us just making the minimum repayments. It is frustrating for me because I am able to see the true benefit of making the extra repayments. Not only can you save tens of thousands of dollars, but by owning the home sooner, a huge weight can be lifted off your shoulder by not being indebted to the bank any longer. Personally I do not like the feeling of owing money to anyone, let alone the bank, so the sooner that debt is cleared the better.

The most important thing to take into account is realising that you do not need to make significantly higher repayments to save significant amounts of money. I will use the property I purchased with my brother as an example.

Principal of $280,000.00
Loan Interest rate of 6.50% (it is variable but we will assume this for now)
Loan Term of 30 years

Minimum repayments would be $1,770 per month. So an overall cost of $637,000 for the life of the loan

Now let's assume we can put an extra $10 per week towards the mortgage, only $10, does not sound like much, just maybe go out for dinner one less night a week, have one less drink while you are at the pub, not much at all.

So now with repayments of $1,810 per month, the overall cost would be $609,750. Loan period of 28 years

So with just $10 extra per week, we have been able to save over $27,000 and 2 years off the life of the loan.

It is numbers like this that really want me to make sure I put as much as I can towards the loan.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets 

If you have any other questions or comments, feel free to email us at StreamlineInvesting@gmail.com

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only.  Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

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