We have been fortunate in recent years that mortgage interest rates have been at historical lows. Whilst it does appear that they will continue to stay low there is no guarantee that this will be the case.
Many people tend to go into remote control and just pay the minimum requirement. That may be all that you can afford. If you can find some spare money to increase your payments, it is one of the most effective ways to save money and get ahead financially. The other really cool thing is that you can be mortgage free so much sooner. Imagine saving a number of years of the term of your loan. When you have paid off your mortgage you will have more cash for living or to build up an investment portfolio.
You may not realise the significance of these additional payments over time, regardless of how small they may be. Most bank and mortgage broking websites have simple calculators that you can use to work out how much your mortgage is costing you. I have done some calculations to give you an idea. Let’s look at the table of numbers below:
Note: these tables are an illustration only as it is extremely unlikely that you will have the same interest rate over the entire period of your mortgage or one this low. Total interest paid does not include the original loan amount.
The key things to note are the monthly payment versus the total amount of interest you pay over the period of your loan. Thirty year mortgages are becoming increasingly popular because it lowers your regular payments and makes it easier for you to afford to purchase a property. Note though how much extra total interest you pay for this privilege.
Another thing to watch is thinking you cannot make extra payments when you have locked your mortgage into a fixed rate and term. Most fixed mortgages allow you to make extra payments so talk to your lender on the best way to do this. Better still structure you mortgage when you take it out so you can easily make additional payments.
Be smart, get ahead financially and take advantage of the current low interest rates. There may come a time when they aren’t so low so having paid off more principal now reduces the impact of higher rates when they happen. Even if all you can afford is an extra $10 per week, that’s only two lattes. The money you will save will be well worth it in the long run.