How is Compound Interest Calculated on a Home Loan?
"Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it".
Albert Einstein
Let's take a closer look
✅In the above illustration I have simply refinanced from 3.05% to 2.48%, and have pretended my interest rate is 8% to act as an "extra repayment". This shaved 16 years off the loan and over $177K in repayments.
✅I see a lot of confusion around "refinancing" your home loan repeatedly, with some going so far as saying this will help you pay off your 30 year loan in 5-7 years. Here I hope to bring some clarity and bust a few myths. Compound interest is powerful enough to shave years off your home loan, however it requires intelligence and some extra payments. So if it seems too good to be true it probably is.
Enquire now with Mortgage Broker Revesby
Here are some options for you
✅Switch to fortnightly repayments: this will equate to an extra 2 repayments a year (as each year has 26 fortnights).
✅Make extra repayments: extra repayments will cut your loan by "years". Also, if you get a tax refund each year, put that into your mortgage and shave off even more. Typically, most of your payments during the first 8 years go towards paying off interest. So this is precisely the time to be hitting those repayments. Anything extra you put in during that time will massively reduce your interest cost and shorten the life of your loan by YEARS.
✅Find a lower interest rate: a lower rate is great, but not if you don't get the options you need to make extra repayments. Remember extra repayments is KEY to paying down your mortgage quicker. And if you do find a lower rate, make sure the cost of switching the loan is less than 1 year of savings in interest.
✅Act like you have a higher interest rate: if you do switch into a cheaper rate, make sure you keep paying the old higher rate. The extra money will help to pay off your mortgage sooner.
✅Offset account: this is simply a transaction account linked to your mortgage. The balance here reduces the amount you owe on your mortgage. And this reduces the amount of interest you pay. As an example: for a $400,000 mortgage, $20,000 in an offset account means you're only charged interest on $380,000. Don't underestimate the power of compound interest!
✅Avoid an interest only loan: unless it's an investment property and part of your strategy. It's all about paying down the principle and reducing the interest bill.
Enquire with Mortgage Broker Revesby
I'm here if you need me.
No fee service.
Matthew Stack
matthew@mortgagebrokerrevesby.com.au
0423 237 242
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