Monthly Archive for May, 2007

I am just about to settle on a property we are buying. A fortnight or so ago I got the Bank’s disclosure paperwork and it stated that over the 30 year life of my new loan, settling this week that I will pay more than $695,000 over the life of the loan. I am only borrowing less than a 3rd of that amount.

So with haste I jumped for my financial calculator and went crazy working out how long it would take for me to pay down the loan and be free of it. I punched the numbers in it and worked out that if you double your minimum repayments each week, not month, that you can shave off 20 years. This got me thinking, why don’t more people pay these loans down as fast as possible without redrawing or refinancing? I do understand that everyone needs a 40 inch plasma and a new boat every time the neighbour’s get one, but really what is going to be a better ‘investment” for the future? Then I think of the ‘Equity Mate ad’s’ from a few years back promoting bad credit/debt habits and it all makes sense - if you are a banker that is.

My feeling is that we have been conditioned into thinking the banks rules are the ones we need to follow whilst the house, the repayments and future growth of the property are ours to keep, so why not get them sooner rather than later! I call this the Don’s Reverse Compound Rate-Buster.

Basically it works like this.

Your loan accrues interest daily and is constantly working against you. You make a repayment and the interest slowly decreases. Then if you are paying on a monthly basis your interest does not get pulled back for another month so it has already increased sometimes further than where it was before the last repayment. I pay the loan down via direct deposit automatically from my salary every pay day. Then the bank also takes the minimum repayment weekly. Then whatever we have left we throw on the loan too. We have a laugh when we see that interest rate trying so hard to build up, then we crush it again!

Another deadly tactic is to pay money down when you get a pay rise or annual salary review increase, or when you get the yearly tax return. This will pay your loan down fast.

Using the following numbers take a look at what the repayments will be on a loan of $250,000 at 6.99% over 30 years.

$250,000 at 6.99% over 30 years = $383.19 is the minimum repayment (principle and interest)
$250,000 at 6.99% over 30 years = $336.06 (interest only)

Then see what happens if we double the repayments.

So we pay down $383.19 x 2 = $766.38
That has taken the length or term of the loan down to 8.25 years.

Now what about the FHOG or other cash you may have to put into the loan to help bring it down to 6 years?

So now we are working on a loan of $243,000 paying the double payments of $766.38 at 6.99% over 30 years.

So what are the numbers telling us now? The results stand at 7.95 years.

Lets also use your yearly tax retrun to pay down even more. The average yearly tax return is $1500 per year, so using this to pay down your loan each year brings the yearly update to 7.5 years.

That is a huge saving in interest, simply by paying down your loan more than just what you have to pay. The best news is that after you have paid your house off you can then go and pay down an investment property using the same method. Just remember you will do it much faster as you will be receiving rent as well as your repayments, so be ready with multiple properties in mind!

I know there will be readers who will read this and think that they have no money to pay the loan down any further, my blogs on budgeting will help. Find a way to beat the banks, beat them at their own game with  the Reverse Compound Rate-Buster!