![]() You have to find that $10 or $1,000 (or whatever it is for you) from your current income.Īnother subset of this option is to switch to fortnightly repayments that are half the value of a monthly repayment. It’s just a matter of scale: the more you pay, the quicker the loan comes down. An extra $10 or an extra $1,000 on top of your minimum repayment has the same directional effect: less interest charged and paying off the loan quicker. One slow-and-steady way to reduce the interest you are charged is to add more to your regular payment. Method #1: pay more than minimum repayments ![]() pay more than your minimum monthly repayment,.There are three options to pay less than the amount of interest due on the full term of your loan: It is in your interest to reduce that interest charged as soon as you can, especially on your home loan as this has no tax benefits in Australia. But soon enough the scale tips, and you’re paying off decent amounts of principal and the interest charged is dropping. You’re charged most of the interest in the first 10 years of your 25-30 year loan, during which time the principal (the amount you owe) remains depressingly high. But that’s not how the interest is charged – it’s not linear. It’s a regular payment, always of the same amount. When you do the calculation at the bank, they tell you an amount you’ll pay each month, every month, until the loan is discharged. So, your repayments over time amount to ~50% interest and 50% principal.Īs you make your regular weekly, fortnightly or monthly payments you’re paying off a bit of what you owe, which reduces the amount of interest you will be charged. To gauge how much this is: most loans that are standard terms (25 – 30 years) will mean you pay off twice what you borrowed. If you have a mortgage, you are being charged interest by the bank each month. You can grab a copy of the spreadsheet I used for the calculations here.īut first things first: how does this offset account thing work anyway, and why should you care? To help you decide what it right for you, I’ve written the following detailed blog. That’s the strategy we will follow, but it may not be the right one for you. We will keep paying the mortgage at the original home loan rate for as long as we can – even if we pay down a lump sum.When we get over $250,000 in the offset and if we’re feeling we won’t need the money for 6mo+, we will pay a chunk off the mortgage to bring the offset account balance back down to $250,000.We finally hashed it out and have landed on our strategy for our home, which is: When the last ‘next time’ came around, I decided to settle this debate once and for all in the same way two engineers have always settled arguments since time immemorial. …at which point our tiny brains explode and we abandon the discussion. Everything in the offset, is OFFSET – you don’t pay interest on it!” Me: “You’re not paying interest on that chunk now. Hubby: “How can that be? Surely I’ll be charged less interest if I pay it off?” Me: “What’s the point in that? You’ll be charged the same amount of interest either way.” Hubby: “But if we pay it down, we can drop our mortgage repayments.” Me: “But if we pay off a lump sum, if we need that cash we’ll have to redraw, and maybe the bank won’t let us.” The discussion that ensues is a well-rehearsed dance: ![]() Once every six months or so, my husband brings up paying off a chunk of our mortgage in a lump sum and I argue in favour of the offset account.
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