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Extra Repayments: Pay Off Your Mortgage Faster
Many Australians dream of owning a home. Yet, the journey of paying off a mortgage seems never-ending. Yet, there’s a simple yet powerful way to shorten that journey—and it all comes down to making extra repayments.
You might be wondering, ‘What’s the big deal if I pay just a little extra each month?Well, it actually makes a big difference. Imagine the difference. Let’s look at how additional payments can expedite your mortgage payments, cut interest, and put you one step closer to being debt-free.
1. The Power of Extra Repayments
The most obvious benefit of making extra repayments is that they directly reduce your debt. Even small amounts can add up quickly. For example, contributing an extra $50 a week to your regular mortgage repayments could significantly reduce your loan term.
The idea is that the more you pay upfront, the less you’ll pay in interest over the mortgage life. Because mortgage interest is calculated on the principal balance, reducing that balance at any time means paying less interest overall.
2. Types of Extra Repayments You Can Make
You can make extra repayments in several ways. Here are a few ways you can make your mortgage work harder for you:
Lump-Sum Repayments: If you come into a bit of extra cash (like a tax return, bonus, or inheritance), putting it towards your mortgage can make a significant dent in your principal balance. These lump sums can speed up your journey to mortgage freedom.
Regular Extra Payments: Adding a little bit to your payment every month or fortnight adds up over time. It’s like slowly paying off your loan without taking anything out of your pocket.
Pay More Often: If you can do so, move your monthly payments to fortnightly or weekly, which allows you to make extra payments throughout the year but you won’t feel as though you’re doing that much. You’ll end up making one extra payment for the year, and your principal balance will continue decreasing that much faster.
3. Interest Savings Add Up
One of the greatest advantages of making extra payments is the thousands of dollars that will be reduced in interest cost over the total life of a loan. If you increase just a small amount on your repayments, it decreases the total sum of interest. Chipping at your mortgage quickens the reductions of the outstanding balance on which interest is added—your interest charges would go down with that.
For instance, for a $400,000 mortgage with a 25-year term and an interest rate of 5%, the extra $100 repayment each month will save you approximately $30,000 in interest and shorten your loan term by more than 3 years.
4. Achieve Financial Freedom Earlier
The most thrilling advantage is that it puts you on the fast track to financial freedom. By decreasing the term of the loan, you free up your income sooner without having a mortgage hanging over your head. You can then re-invest elsewhere in your life-that could be saving for your next property, contributing to superannuation, or having more flexibility in spending.
Moreover, the peace of mind that goes with knowing that you are becoming closer to your mortgage-free day is priceless.
5. Strategies for Making Overpayments Simple
Create Automatic Transfer: One of the easiest ways through which you can make overpayments is by establishing an automatic transfer with your bank. You will be able to set it and forget it; thus, the extra payments will become automatic.
Evaluate your budget: Dedicate yourself to eliminating a few hundred here or there on unnecessary expenses monthly. Cutting dining out or maybe cable services are easily enough free money for some extra payments to the mortgage.
Use any unexpected windfall, such as an income tax return, year-end bonus, or savings on your well-planned vacation, in service of sending money into the mortgage right now. Such sums can often push the difference back into loan duration.
6. Check With Your Lender First
Before making extra repayments, it’s important to consult your lender, as some loans may impose restrictions or fees for additional payments. Always check the terms of your mortgage to ensure you’re getting the most benefit from your extra repayments.
Conclusion
Making extra payments is one of the smartest financial decisions you can make to pay off your mortgage sooner and save thousands in interest. Be it smaller, regular contributions or occasional lump sum payments, every extra dollar makes a difference. With some creative thinking in payment and having an arrangement in place, you may end up with what you dreamed of having—getting out of debt.
Need more advice on managing your mortgage? Contact the team at NRG Financial Services; we’re here to help you navigate the best strategies for your financial future.