When you take out a mortgage on your house, you do not exactly own the property yet. This is why mortgage payers have a goal to finish repaying their loans as soon as possible. After the last payment, the house is finally yours. 

On average, mortgages are in the 30-year term, but is there a way you can fast-track the whole process so you finally have an investment you can call yours sooner? Yes, through extra repayments. 

What is the benefit of paying extra?

You have a set monthly repayment when you take out a mortgage. If you add money on top of the minimum payments required, you enjoy a shorter paying period and some other benefits!

When you pay extra, the principal amount you owe the lender becomes smaller. The interest is computed based on the remaining principal. Put two and two together, extra repayments mean a lower principal which means lower interest. All of these point to savings as the ultimate benefit. 

You can use this loan repayment calculator to see how it works with real numbers. 

Your home equity also increases the more you pay down your loan. And there are some financially beneficial things you can use your home equity for. You could buy a second property off of that or use it for refinancing. A cash-out works, too!

You can enjoy things earlier if you shorten the time you pay for your mortgage

Imagine you don’t have to pay a monthly mortgage anymore and you are free to use your money on things that you care about. Travel, shop, or even retire from your job! 

The peace of mind that comes with finally having a house under your name is going to be worth it. A house is an investment and although it’s not a liquid asset that you can easily trade off for cash when the going gets tough, it is still a valuable asset. 

Once you graduate from paying off your mortgage, you can also take care of other financial matters. You can invest in other things or maybe pay off other debts that you may have. 

Is this applicable to all loan types? 

Variable-rate loans are your best friend if you want to enjoy the perks of extra repayments. Usually, variable rates are a risk to take as the interest you pay differs each period. But, it usually comes with an option for you to make extra repayments as many times as you want and can. 

Fixed-rate home loans are not exactly extra repayments-friendly. Since you are supposed to pay a fixed amount every month for the duration of our loan term, the lender is likely to suffer financial losses if they allow you to make extra repayments as many times as you want. 

This is why there are policies that charge you a break fee should you decide to make an extra repayment. This is to make sure that the lender doesn’t take the disadvantage caused by the extra repayments. 

More things to consider

What is the difference if you pay monthly vs fortnightly?

The ultimate benefit of paying fortnightly is you get to double the amount you will have paid down in a year. In a monthly scheme, of course, you only pay twelve times. If you pay every two weeks, you make 24 payments in a year. 

Going back to the fact that the interest is calculated on the remaining balance, you will be paying less interest after every extra repayment. 

Plan your finances wisely

Paying less interest sounds like a good idea until the time comes when you have to make the actual extra repayments. Spending more on a mortgage means you have to take out significant costs on your budget every month. 

However, it’s not impossible. Either you cut down on other unnecessary expenses or you add a source of income. 

When it comes to making sure you don’t miss deadlines, online banking features are a great help. Just add your mortgage repayment as an automated biller to your online banking account. 

Is making repayments the right move for you?

The answer to this question is, it depends. The ultimate nod or pass still boils down to your financial plans. You can consult with a trusted broker to help you decide. After all, our goal is to help you make wise financial decisions.