A financial plan I personally follow is keeping any commitments to fewer than 10 years. In current times we have very easy access to very large amounts of loans. While access to this money enables us to enrich our lives and possessions it can also place a huge financial burden on us, chaining us to debt for all of our working life if we are not careful.
The reason I like sticking under a 10 year timeframe can easily be understood by comparing a 10 year term to a 30 year term. I’ll use $500,000 as the borrowing amount at 6%:
| Total Payments | Interest Paid | ||
| 10 year term | $ 666,123 | $ 166,123 | |
| 30 year term | $ 1,079,191 | $ 579,191 |
As the table shows, the price for borrowing $500,000 for a 10 year term is $166,123 which is still a total interest cost of 33% of the borrowed amount. For the 30 year term the cost is $579,191 or 116% of the borrowed amount. 33% I can accept, 116% has no appeal.
It is not necessarily simple to understand how to work within 10 year blocks. Having a mortgage structure that allows you to pay off a loan in 10 years can be very different to a mortgage with a 10 year term. The former can be quite flexible while the latter very rigid. What is important is having a plan or understanding of how this can be achieved. It will be different for everyone.
Moving in 10 year blocks instead of 30 year blocks creates enormous opportunity – better houses, greater investments and ways to give you are far better work/life balance. Before you commit to your next financial decision why not see how it can be achieved in 10 years or less?
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.
