How to top up your mortgage and reduce your debt

Imagine your mortgage is a giant block of ice. The only way it shrinks is the slow drip, drip, drip of monthly repayments over the years. Now, envision using an ice pick to smash out a huge chunk.

This is the analogy used by John Tindall, a Choice Home Loans mortgage broker in Wattle Grove, Sydney, to explain the power of topping up a mortgage; making extra payments, either regular or piecemeal, to pay it off quicker.

“Where it’s possible, making additional repayments reduces your debt faster, meaning you pay less interest and build your ownership of the property faster. It also builds up a ‘buffer’ of extra payments in case you miss one in the future,” Tindall says.

Small tweaks to how a mortgage is paid – like switching from monthly to fortnightly payments or paying an extra set amount each month on top of regular payments – can make a large and lasting difference.

 

“For those with a $400,000 mortgage, over 30 years, paying 4% interest, switching from monthly to fortnightly payments effectively adds another two payments into your year, which means you’d save $45,000 in interest and pay the loan off four years and one month earlier,” he says.

Paying an extra $100 each month saves $30,000 in interest and cuts two years and eight months off the life of the loan, he adds. Even a minor, one-off payment of $500 each year can save $13,000 in interest and reduce the loan length by over a year.

People should think of their mortgage when they have surplus funds, Tindall says.

“Some people have a clear budget, with savings goals and dedicate surplus income to paying down the mortgage. Others may choose to use tax refunds, an inheritance or other windfalls to pay a chunk off the mortgage. Having set regular payments is easier and better discipline,” he says.

“If you added $2000 at tax time each year, for example, to that $400,000 mortgage, you’d save $46,000 and cut four years and three months off your loan,” Tindall explains.

Using an online calculator is a great way to see how an additional few dollars a month can reduce the life of a loan dramatically.

“Couple this knowledge with an active plan, such as scheduled additional repayments and you’re well on the way to smashing that loan down!”

This information is of a general nature and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.