What is it worth adding a few more dollars to your mortgage repayment? The answer might surprise you.
Many borrowers in New Zealand choose the longest initial term and the minimum repayment for their mortgage. There are very valid reasons for this. When applying for a loan, the longer the term the lower the monthly, fortnightly or weekly repayments will be and, therefore, the higher potential loan can be obtained. In addition, most new applicants are pushing the limit of what their incomes will allow them to borrow so choosing the minimum repayment helps make sure they can make the new loan payments plus meet all their other obligations and have some spare cash to spend on themselves.
However, what if you chose to pay more than the minimum?
Let’s use an example of a $500k loan over 30 years at 6.89% …and make the unicorn assumption that the interest rate will remain the same for the full term of the loan. With a minimum monthly repayment of $3,290, the total interest paid over the loan term would amount to $684,000, resulting in a total cost of $1,184,000.
What if you smashed out a family budget and identified $200/mth ($50/week) that you could ADD to your monthly repayment? Surprisingly, this simple adjustment would lead to substantial savings. By paying the additional $200, you could save $130,000 in interest and shorten the loan term by almost 5 years. Pretty amazing right?!
While this approach may not work for everyone, it's certainly worth looking at if you're able to make room in your budget. Even small additional payments can make a significant difference in the long run, helping you pay off your mortgage faster and save on interest costs!
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