CUT YOUR MORTGAGE IN HALF!
By Tony Rizk
www.smartacademy.edu.au
Home owners, you can literally cut your mortgage term in half simply by making extra principal payments!
The next time you write your monthly mortgage cheque, write a second cheque for the “principal only” portion on next month’s payment. This, by the way, is usually the smallest portion of the payment. For most mortgages, the monthly payment is a constant number; in our example below, it is $1,000. Only a small portion of that $1,000 monthly payment normally goes towards paying off the actual principal of the mortgage itself. Remember, when the principal is paid off, the loan is paid off.
Example of a Typical Mortgage *
Month Payment Principal Interest Balance
- Jan $1,000 $40.00 $960.00 $98,172.85
- Feb $1,000 $40.39 $959.61 $98,132.45
- Mar $1,000 $40.79 $959.21 $98,091.66
- Apr $1,000 $41.10 $958.81 $98,050.47
In the example above, when you make the January payment, you can also write a second cheque for the “principal only” part of the following month’s payment, in this case, $40.39 for the February payment. Then, you will not have to pay the interest on $40.39 when making the February payment. The following month, make the March payment for $1,000 and pay the “principal only” portion of the April payment for
$41.10. Continue to do this every month, and you will never have to pay interest on the principal that has been pre-paid. Consistently following this strategy will enable you to pay off a 30-year mortgage in 15 years. This is a powerful strategy for saving a tremendous amount of money on your interest payments and cutting the term of your mortgage in half.
- If you do not have an amortisation schedule from your lender, get one!
How to eliminate your debt without increasing your income
Example; a couple have the following debts with monthly repayment, and they were able to find $290.00 in their budget to eliminate their debt….
Balance Payment factor
Home Loan $100,000 $1000 100
Car 1 $17,000 $600 29
Car 2 $9,000 $350 26
Visa $6,000 $300 20
Master $4,500 $250 18
AMEX $1,500 $100 15
Personal Loan $8,000 $300 27
Firstly, you need to consider the ‘factor’ column. This column represents how many payments are remaining, that is a Personal Loan of $8,000 at $300 per month will take about 27 payments. We are going
to look at the lowest factor, which is the Myer Card of $1,500 at $100 payment with a factor of 15 as it is the lowest. We want to pay this off first as it is the quickest to pay off. Therefore, we take the $290 spare we have and add it to the $100 per month payment already being paid towards the Myer card, which equals a total of $390. Divide this into the $1,500 balance on the Myer card balance which equals approximately 4
more monthly payments and the $1,500 is completely paid off. Then we go to the next lowest factor, that is Mastercard $4,500 with a $250 payment. We now add the $390 we were paying off the Myer card as it is now spare. We can now pay $250 + $390 = $640 per month of the $4,500 on Myer card = 7 months. 4 months + 7 months = 11 months since we started the debt elimination strategy and already Bill and Mary can see significant progress. Now we look at the next lowest factor which is Visa at $6,000 at $300 per month and we repeat the cycle. $300 plus $640, now spare = $940 total into $6,000 balance on Visa = 6 months approximately to pay off. 6 + 11 = 17 months for Visa, Mastercard and Myer card to be all paid off.
The next lowest factor is Car 2 with a balance of $9,000 at $350 per month. $350 and $940 spare = $1,290 total into $9,000 = approximately 7 months. 7 months plus 17 months = 24 months or 2 years into the debt elimination plan.
In reality, it would be sooner as the $9,000 would already have reduced to less due to payments made in the first 17 months, therefore our plan is conservative. The next lowest factor is the Personal Loan of $8,000 at $300 per month. $300 + $1,290 is now spare = $1,590 total into $8,000 = 5 months approximately. 5 months + 24 months = 29 months in total so far. The next lowest factor is Car 1 of $17,000 + $600 per month. $600 + $1,590 is now spare = $2,190 per month into $17,000 = 8 months approximately. 8 months + 29 months = 37 months so far. The last one is the Home loan of $100,000 at $1,000 per month. $1,000 per month + $2,190 now spare = $3,190 into $100,000 is 31 months approximately. 31 Months + 37 months = 68 months or 5 to 6 years. This strategy is often far more effective than consolidation of loans as many people consolidate, but they run up their credit cards again which defeats the purpose as they get in more debt. Remember, getting into debt is a habit. It is the habit that has to change and consolidation loans do not guarantee a habit change. There are numerous ways to eliminate this debt in 3 to 7 years. I have covered just one way which is effective.
To Your Success
Tony Rizk ( BBus., MMgmnt., MComm. (Hons.)., Ph.D candidate) is the founder of Smart Academy which is a professional consulting, training and educational firm. We provide training programs, workshops, and consulting services that dramatically enhance personal performance in the areas of Real Estate, Mortgage broking, Financial planning, Leadership and Managerial skills.
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Reduce Your Mortgage Reduce Your Mortgage Interest Balance, Mortgage Payment, Mortgage Term, Mortgages, Principal Interest, Principal Mortgage, Principal Payments, Rizk, Small Portion
