A mortgage is basically a set repayment plan. What this means is it is a schedule of payments that will mean X amount borrowed will be paid off in Y time frame. From this the amount of principal and interest can be calculated. At any given point and for any given repayment amount you are able to see the mix of principal to interest for both the next repayment and the remaining loan balance.
For example a $450000 mortgage on a 30 year term means principal payments of $450000 and interest payments of $573950 (at 6.5%). For the monthly mortgage payment the 5th month has a payment of $2844.31 of which $415.69 is principal and $2428.61 is interest.
Why this is so important to know is that while this is initially a set pattern any extra payment made will change the ratios and amounts, to your benefit. Understand that the principal is a set amount that must be paid but the amount of interest paid is up to you. You can pay the minimum amount (maximizing how much interest you pay) and keep the banks hugely profitable or you can start changing the ratios and reap the benefits.
If we used the same numbers in the above example and made an extra $100 repayment in the 5th month it would reduce total interest charged by $580. So a 5.8 times return on your money! Maintaining this monthly extra $100 into your mortgage would save just under $65000 and almost 3 years off the term.
A good mindset to have is anytime you make a minimum repayment you are benefiting your lender, anytime you make any payment above the minimum you are rewarding yourself. Get greedy!
The information contained in this article is of a general nature and should not be taken as advice. It reflects the opinions of the writer only and does not necessarily reflect the opinions of New Zealand Home Loans
