We love sharing the many ingenious savings tips learned from members of savings website, simplesavings.com.au
This month we bring you strategies members have used to reduce mortgage debt. We think you will be blown away by their clever ideas, persistence and awesome results.
$100 extra on mortgage repayments saves $145,812
Writing down how much I can save on my mortgage and keeping a note in my wallet motivates me to save money. My husband and I recently bought our first house with a 30-year loan of just under $192,000. By adding an extra $100 to our regular repayments we will save an incredible $145,812 in interest and cut almost 11 years off our loan. You can easily calculate how much you would save on your own loan by using the online extra repayment calculators found everywhere on the internet. (Just Google ‘home loan mortgage calculator tool’.) I remember this figure every time I want to spend that extra $50 on something I don't really need. It's a great reminder of just how much your money is really worth.
$150,000 paid off mortgage in under 6 years
I don't have to think about saving or spending now – it just comes naturally. In the past five-and-a-half-years, we have managed to pay a whopping $150,000 (principal) plus interest off our mortgage and still live happily and comfortably.
My husband and I have three young children and our combined income is only average, ranging between $50,000-$70,000 per year. Readers may think 'I could never do that, I would have to go without too much' or 'that's impossible', but this is not true. We don't go without; in fact, we feel we do pretty well! I cannot name just one single thing that has helped us to achieve this and still be happy – it’s a multitude of tips and hints, all of which can be found on the Simple Savings website. I have always been a saver, so for me this was not hard, but my husband found not being able to spend money willy-nilly difficult at first. These days, he thinks before he spends and at times even proudly tells me of his smart purchase or why he didn't purchase!
$3 a fortnight makes mortgage $1800 cheaper!
I have discovered how just $3 a fortnight can make a big difference to your mortgage! Check out the www.moneysmart.gov.au mortgage calculator. Here you can see how increasing your mortgage payment by even $1 a fortnight will change the total interest paid over the life of the loan. Look to the right of the home page and select 'Mortgage Calculator'. Use the 'how can I repay my loan faster' tab to select this calculator. Next, enter your current mortgage balance, term, interest rate, repayments and frequency. You'll see the capital in one colour, then the interest and fees in another. Click 'compare', then enter your repayment plus $1 more. Now you'll have two bar graphs to look at. By rolling your mouse over the fees and interest section you will see the total sum. Subtract the higher repayment sum from the original to calculate your saving in interest over the loan term.
In this way I have worked out that for our mortgage, just $1 extra paid every fortnight equates to approximately $600 in interest saved over 24 years. In addition, as ours is a variable rate loan, every extra dollar paid now reduces the future impact of rising interest rates. The less capital we owe when rates go up, the smaller the increase in repayments. This may seem a small, slow saving but it is money you can use on something else, such as enjoying your retirement!
$50 a week extra on mortgage saves four years
We will knock four years off our mortgage by increasing our mortgage repayments instead of putting money into a savings account for our children.
When our son was born we decided to put $50 into a bank account for him every week, so that he could have a lump sum when he was 21. We then realised that if we put this money towards our mortgage instead, we could cut four years off the mortgage and have it paid off by the time our first child is 13. We think this is a better way to save money for our children in the future.
$50 extra a month put me thousands ahead on home loan
When you have a large debt such as a mortgage, even a small extra sum such as $50 paid additionally can make a massive difference. I did this in the early 90s and am sure it still applies. Whilst I 'only' needed $60,000 back in the good old days, paying off a sum like this on my own still seemed scary. I talked to a lot of friends about how to go about this and collected information wherever I went. When the time came I decided to take out the amount for the longest time possible (25 years) and agreed to pay the minimum amount every fortnight PLUS an extra $50 on top. In comparison, a friend of mine took out his loan about the same time and just stuck to paying the minimum interest only every month. After one year alone I was thousands ahead of him because I was paying off the actual mortgage as well, not just the interest!
1 per cent rule pays off debts faster
In our efforts to get ahead financially, my husband and I have made a new rule regarding our wages. We both contract, so our income is variable. However, no matter the amount, each time either of us gets paid, 1 per cent of our income is now paid directly off the mortgage. Depending on how we're going at the time, we may also distribute additional 1 per cent increments to the kids' education funds, savings and paying off the credit card to a total of five per cent of our income. This is such a small amount that you can adapt to not having it to spend, but it really does add up when trying to cut down the debts and prepare for the future!
1 per cent savings rule makes debt reduction less daunting
I have found reducing my mortgage to be far less of a daunting task since I put my savings into baby steps. I focus on saving just 1 per cent of my mortgage total. Whatever number this equates to, I then make as many cuts as I can to save that number – for example, if I'm about to pay $5 for a frappe, I stop and think how much that $5 is worth to my 1 per cent instead, and this makes me change my mind. I would like to think that over the next 10 years I will save this per cent figure 100 times. This can be applied to your mortgage, personal loan, credit card or whatever – all you need to do is work out 1 per cent of your debt to get your own figure. I have found that once you start keeping that number in mind, it doesn't take many exchanges in decisions to get to that 1 per cent!
13 months of mortgage payments
While it is widely known that paying your mortgage weekly or fortnightly can save you thousands in interest on your home loan, using this tip can help you pay off even more!
I divide my monthly mortgage payments by four and pay that much extra each week. For example, a $1400 house loan repayment would amount to $350 per week. There are 52 weeks in a year, which means that there is an average of about 4.3 weeks in a month, so dividing 52 weeks by four weeks (because you are dividing your payments up by four weeks, not 4.3 weeks) you actually get 13 months. Making payments this way actually equates to an extra month's payment every year, or as in the example, an extra $1400 per year!
The way this works is that most months have four pay days in them (if you are paid weekly), but four times a year you will get a month with five pay days. By paying the same amount off your house loan each week in the four months that give you five pay days, you are making an extra four weekly payments a year.
Over a period of five years, you will have paid an extra five months' worth of payments, or on a $1400 a month loan, an extra $7000 off the principal. Of course, this has a cumulative effect on the interest, thus saving many thousands of dollars and paying off your loan sooner.
The same principal works if you are paid fortnightly; just divide your payments by two (number of fortnights in a month). By doing it this way you will make an extra two fortnights' payments a year, or an extra month's payment.
This method doesn't just work on home loans. The same principal works for other monthly repayments too. Check out your car loans, credit card payments, personal loans and others to see if it will work for them. Just divide the monthly payment by four, pay that amount each week and watch your debts disappear!