Blog

PAYING more than the minimum amount off your mortgage can save you hundreds of thousands of dollars over the loan term.

And with interest rates at record lows the potential to save is even greater.

So if you are one of many homeowners choosing to pay just interest on your loan think how much it could cost you in the long run.

DO THE SUMS

On an average $300,000 loan you would need to pay $1572 a month in principal and interest to pay off the loan in 30 years, figures from financial comparison site Mozo show.

Paying just interest, the variable rate repayments reduce to $1315, leaving an extra $257 a month in your pocket.

But these loans are really not viable long-term options for the average property buyer because they don’t help you earn an asset, says Mozo spokeswoman Kirsty Lamont.

‘Principal and interest loans are designed to allow you to pay down the debt so at the end of the loan you are debt free and you own the property outright.’

The best option, while it may seem harder in the short term, is to make more than the required repayments on your loan.

Taking the same $300,000, 30-year loan, if you pay an extra $50 a month on top of the required $1572 for interest and principal, you will save $20,200 and pay the loan off almost two years earlier.

Paying an extra $100 a month will save you an extra $37,400 in interest repayments and the loan paid off three years and seven months earlier.

IN YOUR INTEREST

Many borrowers opt for interest-only repayments on investment purposes so they can negatively-gear it and reap the tax benefits, but owner occupiers who opt for interest-only repayments receive no tax benefits.

Shadforth Financial Group’s head of advice John Barton says making interest-only repayments on your own home’s mortgage can be a good idea if you are smart with the surplus funds.

‘Interest-only repayments don’t matter if you understand them but if you spend the money you would have used on principal and interest repayments at restaurants, on poker machines or on flat-screen TVs it is a bad idea,” he says.

‘You are relying on your property value going up a lot over the life of the loan and you are going to pay a lot more interest.’

He says if you take the extra money and save it and invest it you could end up better off – but you would have to know what you are doing.

PAYING INTEREST ONLY

PROS

– Frees up more cash and can be useful if your household income changes, for instance if you lose your job or have a baby.

– Makes your monthly repayments lower.

– Allows you to invest the money elsewhere.

CONS

– You will never pay back the home loan debt.

– You will not a build a buffer if interest rates rise in the future.

– You don’t get any tax benefits.


Posted by Sophie Elsworth – News Limited Network on 7th April, 2015