Over the next three months I will be presenting articles that could, quite literally, save you hundreds of thousands of dollars over the life of your loan and will dispel some myths about the value of property and how to pay for it. These little gems of information have been picked up through my own experience in the field and should you decide to put them into practice, will put you miles ahead of the game.
Myth #1 It makes no difference to your home loan if your repayments are weekly, fortnightly or monthly.
Having your repayments drawn out more frequently can save you a vast amount of money. Of course, this is only for those of you who are paying down the principal, but the question of whether to pay your loan weekly, fortnightly or monthly is passed over so casually when establishing a loan it would appear to be almost irrelevant.
The truth is, most banks contract their home loans out on a monthly basis, so if you choose to pay fortnightly or weekly then the bank considers these increases in frequency as “extra repayments”, putting the additional sum towards the repayment of both the principal and interest.
Now paying the loan on a weekly basis does mean making more payments over the year than paying monthly or fortnightly. For me it’s about $20 per week per loan. But the key is that it also reduces the principal by a small amount each week, helping to reduce the interest that is calculated on an ongoing basis.
So what does this mean for the bottom line? Well I decided to shift the repayments from monthly to weekly for one of my loans recently. Remember it cost me an extra $20 per week over the year, which I would have probably spent anyway. However the difference it made to my 30 year loan was as follows: Paying fortnightly – shave 2 years off the life of the loan. Paying weekly – shave 7 years off the life of the loan.
That’s right. 7 years!
Some of you may have thought that because you have an Offset Account set up that this doesn’t apply. You have to remember that the money you have in the Offset Account only “offsets” the interest you pay – it doesn’t help to reduce the actual principal amount itself. Increasing the frequency actually reduces the loan, albeit by a small amount, helping to reduce the overall life of the loan and the interest bill on top of it.
And here’s a little tip for those of you love the Offset feature of your home loan. Next time you apply for a loan, ask whether your lender provides “multiple Offset Accounts”. Personally, my partner and I struggle to keep tabs on all the areas of life we put away money for – holidays, personal spends, property accounts etc., so although we do our best to use our Offset Account as the primary, we invariably have a number of other small accounts so things don’t get mixed up. To counter this problem, some banks provide multiple Offset Accounts, allowing you to save money on your loan and still stay organized with your accounts at home.
Next month – Why I choose to use a Principal and Interest Loan rather than the Interest Only Loan favoured by investors.