Freelance Writing Jobs | Today's Articles | Sign In

Financial Downturn can Help Decrease Loans

Use the Current Economic Factors to Reduce Home Mortgage Debt

Aug 20, 2009 Pauline Mascarenhas

The decades-low interest rates can help with paying extra on a home loan. Repaying a mortgage faster than necessary creates a useful buffer and may reduce the term.

The current unique economic factors such as very low interest rates and increased household income (Australian Bureau of Statistics) can help to pay home loans at a level higher than the minimum required by the lenders. Bearing in mind that low interest rates will not last forever, it makes sense to use the opportunity to get ahead on repayments.

Advantages of Paying Extra

Create a financial buffer, that is, be ahead of the required repayments.
Reduce the loan term.
Pay less interest on the life of the loan
Have the flexibility to take a 'repayment holiday.' In Australia, a 'repayment holiday' means that if the mortgage repayments are ahead of the rate set by the lender, then the borrower can choose not to pay monthly repayments until the required level is reached. Of course this has to be done in consultation with the lender.

Lump Sum Payments into the Loan

Making a lump sum payment (big or small) into a loan can make a substantial difference to the loan term as well saving on interest. For example, take a loan of $300,000 at 5.85% over 30 years. If the borrower made one lump sum payment of $500 in a year (in addition to the required monthly payments), the term would reduce by one month and the total repayments by around $2,375. Imagine the difference it would make if a lump sum of $500 was made every year.

Effect of Increasing the Repayment Frequency

Depending upon the loan type and lender, a property owner could save thousands of dollars in interest by paying a loan every fortnight rather than monthly. Say a borrower has a repayment of $2,000 per month. This will pay off $24,000 off their loan over 12 months (12 x $2,000). However, if the payment was divided by two- $1,000- and paid every fortnight, the annual repayment would be $26,000 (26 x $1,000) because there are 26 fortnights in a year. So paying fortnightly allows the borrower to pay the equivalent of one extra monthly payment.

Rounding-up the Repayments can Make a Difference

Just the simple fact of 'rounding-up' the monthly or fortnightly repayment amount to the nearest $50, $20 or even as little as $10 will make a significant difference to the loan term and the interest saved. Taking advantage of the current low interest rates to pay off additional amounts on a home mortgage will, in addition to reducing the loan term, save thousands of dollars in interest payments.

The copyright of the article Financial Downturn can Help Decrease Loans in Mortgages/Loans is owned by Pauline Mascarenhas. Permission to republish Financial Downturn can Help Decrease Loans in print or online must be granted by the author in writing.

Financial Downturn can Help Reduce the Mortgage	Current Economic Factors Help Lower Home Loans	Save Interest by Making Lump Sum Payments
Frequent Repayments to Reduce the Home Loan	Additional Payments Reduce the Home Loan Term