Fast Money: Conquer Your Mortgage

By Ashley Ormond

Do your finances control you? Frustrate you? Limit you? Well take control of your money today and get more of what you want from life.

Bestselling author, Ashley Ormond guides you through the mortgage maze saving you thousands of dollars. Fast Money: Conquer Your Mortgage is a jargon-free, practical guide that will get you closer to paying off your mortgage and on the road to financial freedom, fast!

• Language: English
• Publisher: Wiley
• Release date: Feb 5, 2013
• ISBN: 9781118612996

Book preview

Chapter 1

Do the numbers

Most of your repayments go towards paying interest to the lender, and in most cases less than half of your total repayments actually go towards paying back the amount borrowed (the loan principal). For example, if you borrow $300 000 over 25 years at 7 per cent, you end up paying back a total of $636 101 (not counting fees and other charges), which is more than double the amount you borrowed in the first place.

Table 1.1 shows the situation for loans at interest rates of 5 per cent, 7 per cent and 10 per cent when $300 000 is borrowed over 25 years.

Table 1.1: mortgage repayments for different interest rates when $300 000 is borrowed over 25 years

The next important factor is that the loan balance reduces very slowly at the start of the loan, because in the early years the majority of each repayment goes towards paying interest to the lender and only a very small part actually reduces your principal balance. The higher the interest rate, the greater proportion of each payment goes in interest and the slower the balance reduces over time. This can be seen in figure 1.1.

Figure 1.1: mortgage balance reduction at different interest rates

Many people get a shock when they find out how much they still owe on their mortgage after they have been paying it off for years. For example, for a 7 per cent mortgage over 25 years, after five years (or 20 per cent of the total term) you might expect that about 20 per cent of the loan would have been paid off. Wrong! After 20 per cent of the loan term, you will have paid off only 9 per cent of the loan and you still owe 91 per cent of it! Even after half the loan term (12.5 years), you have paid off only 29 per cent of the loan and you still owe 71 per cent! It may seem unfair but that’s how the numbers work. All principal-and-interest mortgages work this way.

Table 1.2 sets out loan balances at various stages, at different interest rates. The higher the interest rate is, the slower the balance reduces over time and the more you owe at any stage during the loan.

Table 1.2: how a 25-year, $300 000 loan reduces over time at different interest rates

If you currently have a mortgage, you should complete the following exercise:

Work out how much you have paid to the lender so far by multiplying your monthly payment by the number of payments you have already made:

I have already paid: _________ per month ×________ months paid = $_______

If your repayments have changed since you took out the loan, still add up the total you have paid so far.

Next, see how much has come off the loan principal by comparing the current loan balance with the amount you initially borrowed plus any additional amounts borrowed.

Amount I have paid off the principal:

Initial loan of:________ minus current balance of:________ total amount borrowed = $________

Finally, work out how much you are contracted to pay in the future by multiplying the monthly payment by the number of months remaining in the term.

I still owe:________ per month ×_______ months left = $________

If you have an interest-only loan you need to add the principal onto the total amount payable because you will still owe this at the end of the loan term.

If these results don’t scare you into action, then nothing will. This exercise drives home the importance of getting a low interest rate on your loan and paying off as much as possible as early as possible to minimise the interest payable and to get rid of your debt sooner.

Chapter 2

Increase your mortgage repayments

One of the most powerful ways to pay off the mortgage faster is to increase your regular monthly mortgage repayments. Even a small increase in your monthly payments can dramatically reduce the total interest bill and get rid of it sooner.

For example, for a typical $300 000 mortgage at 7 per cent over 25 years, the monthly repayments would be $2120.34. If you increased your monthly repayment amount by just $100 per month (or a little over $3 per day), you would reduce your total interest paid by 13 per cent, saving more than $43 000 in interest, and you would pay off the loan 2.7 years sooner. So, by chipping in an extra $3 per day you save $43 000 and you will be out of debt nearly three years earlier!

If you can manage to pay $400 per month (about $13 per day) more than the standard repayments you reduce your total interest paid by 36 per cent, saving you more than $122 000. You would pay off the debt nearly eight years sooner. Figure 2.1 shows how the mortgage balance reduces compared with a standard mortgage with the regular payments.

Figure 2.1: increase mortgage repayments by a fixed dollar amount

Even if you increase your repayments by just $1 per day you can save $15 000 and cut almost a year off the average mortgage term. Not bad for just $1 per day! Imagine getting out of debt a whole year earlier by spending just $1 per day. That’s a whole year that you can put the money towards your investment plan, instead of still paying off the mortgage. Looked at another way, by spending just $1 per day starting now you can retire a year earlier! Surely everybody can do this.

If you don’t think that you can increase your loan repayment, think back to when you took out the loan. If it was a few years ago your income was probably less back then, but you managed to make the repayments. In the years since the start of the loan, your income probably increased slightly each year or so, but the extra money was just spent on everyday expenses. If you are really serious about paying off the mortgage sooner, you will find out where this extra money goes