A mortgage – your home loan – is perhaps one of your biggest investments you will make in your life. It is also an investment that is going to take you the best part of your life to repay, as most mortgages have tenures of 20 to 30 years. Here are some facts about mortgages and a few tip of how to repay it sooner.
Understanding your mortgage payments
Mortgage repayments are calculated in monthly equated instalments. These instalments, called the monthly mortgage payment, consist of about 84 percent interest and 16 percent of the principal component. However, this is determined by the size and the tenure of the loan. Because longer term loans – unlike small short term loans like quick loans or payday loans – attract smaller monthly mortgage payment, the 30 year mortgages are the most popular.
There are four factors that determine the amount of the monthly mortgage payment. These include the principal amount, taxes, interest and insurance. For the first five years you will be paying a major part towards the interest component and a very small amount towards the interest component of the loan. Then the reversal begins where the interest component begins to lessen and the principal component increases. This is why you should try to repay your mortgage as soon as possible.
How to Repay a Mortgage Fast
To begin with, as with any cash finance assistance, you should contact your mortgage company and ask for an amortization of your mortgage. This is a breakup of each monthly payment you make towards your mortgage. The amortization contains the instalment number, the interest component, the principle component and the outstanding balance. As you will see from the amortization, your outstanding principal amount remains almost unchanged for the first few years. You need to pay as much as you possibly can to save as much as you possibly can.
To do this you will have to make what is called “part payments” towards your principal amount. However, you should be very careful when making these payments. Some mortgages will have a penalty clause for part payments. They include this in the terms and conditions to make up for interest they will lose by you making a part payment. Others may have a clause where you can make part payments only in amounts that are in multiples of your monthly mortgage payment.
When you make a part payment you should specifically inform the mortgage company that the amount is to be credited towards the principal amount and not be treated as an advance monthly payment.
Open an offset account
Another trick to save on the interest of your mortgage is to open an offset account. This account usually comes with a fee but if the amounts you will keep in this account are substantial you will save more on interest than you will on account fees.
An offset account is associated with your mortgage account and any money you keep in the offset account is treated as a payment towards the principal amount of the loan and interest is not calculated on this amount. At the same time this amount can be withdrawn anytime when it is needed. When it is withdrawn the loan amount automatically increases proportionately and interest begins to accrue again.
Repay the mortgage in chunks
Finally, you will do yourself a world of good to divert all additional income towards the repayment of the mortgage as and when you get the chance. If you come in for some money from investments, bonuses, or even if you have to cut down on expenses to repay the mortgage you should endeavour to do so.
The more you pay towards the principal amount of your mortgage the more you save on taxes and your equity in your home increases accordingly. After all your effort you can sit back and enjoy a hundred percent ownership of your property.