Paying off your mortgage quicker

[DanielG]

Hi Everyone,

Wanted to ask a question. If for example your loan outstanding of $300,000 and your paying $1500 a month in interest and say you put $50,000 into the mortgage. Does this mean that the interest calculated on your mortgage monthly is now of the $250,000 and so your monthly repayments are now less every month then before you put that $50,000 in?

Im only asking cause thats my assumption and I was thinking of doing something like this but my mate tells me thats not the case. Even if you put $50,000 you still pay the $1500 a month regardless.

Im on a variable rate btw.

Thanks

 

[Rolf Latham]

Hiya Daniel

In general, the Principal and Interest repayment will remain the sam, BUT the amount of interest charged to the loan will be less, thus the loan is repaid more quickly

ta
rolf

 

[boomtown]

*edit* rolf beat me to it

 

[DanielG]

Hi Rolf, Im sorry i have some difficulty understanding that. Are you saying that if i put in say $150,000 into the mortgage which cuts the amount outstanding in half, that i still pay $1500 a month in repayments?

 

[hobo-jo]

As I understand it the repayments would remain the same, but the loan would be paid off quicker (as Rolf has pointed out). The loan repayments are calculated on the loan amount which is the outstanding balance + amount you have available to redraw. The repayment size wouldn't change it would just mean that a larger portion of the repayment is principal, hence paying the loan out sooner.

You can most likely pay a fee to clear/reduce the ahead amount to make the payments calculated on the balance of the loan and this would make the repayments smaller.

 

[MarkB]

Yes, the mate is right, but...

When I worked at a bank each P&I loan had 3 balances:

1. original balance (amount of loan)
2. current balance - this balance falls as per the net repayments to the principal you make
3. I cannot recall what the name was, but basically it was "the balance the loan ought to be if all planned repayments had been made " - this balance falls in line with the loans originally planned amortization schedule

Essentially the bank always wants balance 2 to be less than balance 3, whereby at least the minimum pre-determined level of repayments is made (ergo the loan is "in order").

Drop $50k on a loan (as per your example) and, everything else being equal, the loan will be at an actual balance (#2) well below the banks desired balance (#3).

You now have a case for a repayment holiday.

That's where you're relationship with your banker comes in - I wouldn't recommend stopping repayments (even temporarily) without talking to the bank first.

Or, again talking with the bank officer, you also have a case for effectively renegotiating the loan repayments - but only to the extent that the amortization of the loan at least keeps up with the previously agreed schedule.

 

[twobobsworth]

This happened to us a couple of years ago where we made a large lump sum payment to PPOR loan.

Got a letter from CBA about 6 months later advising our monthly repayment had been recalculated (reduced) to bring it in line with our mortgage contract, oh and they said it would help us with budgeting! We just kept it at the same level anyway.

 

[jingo]

Hi Everyone,

Wanted to ask a question. If for example your loan outstanding of $300,000 and your paying $1500 a month in interest and say you put $50,000 into the mortgage. Does this mean that the interest calculated on your mortgage monthly is now of the $250,000 and so your monthly repayments are now less every month then before you put that $50,000 in?

Im only asking cause thats my assumption and I was thinking of doing something like this but my mate tells me thats not the case. Even if you put $50,000 you still pay the $1500 a month regardless.

Im on a variable rate btw.

Thanks

A possibility to reduce your payments would be to establish a Home Loan Interest Saver account against your loan and set your loan repayments to interest only.

You could deposit your $50,000 into this account. The interest would be calculated only on an amount of $250,000 (not $300,000). It may be possible for you to reduce your existing payments by switching your loan to interest only. This means that you will not pay principal on the loan - just the interest In this case you will only be charged interest on the $250,000, instead of $300,000. You will also retain access to your $50,000 in case you need it for further investments or as emergency money.

You could keep adding money to the Home Loan Interest Saver account and pay your mortgage off with the aid of this facility.

Regards Jason.

 

[devo76]

i Just recieved $100,000 from a sale of a toy of mine. Im dropping it straight into my P and I loan.I am now getting the remaining balance refinanced as the whole loan amount and interest only( New smaller loan). This reduces my weekly payments by around $200. I will continue to pay extra but its just some breathing space if needed.

 

[Aaron Sice]

i;ve paid down my mortgage previously and just asked the bank to readjust the payments to suit the existing term.

mind you, this was 2003 not 2008.

 

[boomtown]

This happened to us a couple of years ago where we made a large lump sum payment to PPOR loan.

Got a letter from CBA about 6 months later advising our monthly repayment had been recalculated (reduced) to bring it in line with our mortgage contract, oh and they said it would help us with budgeting! We just kept it at the same level anyway.

Once you get a nicetwobobfish on your line you don't want to let it get away!

 

[DanielG]

There are some mixed responses here. I guess Ill have to ask my bank manager what the deal is.

I dont see why if i drop 50 gs in my mortgage, considering there is still 28 years to go on my loan and i dont want that to change, I should be paying a lesser amount every month.

Thanks for your help guys.

 

[granev]

you will have 2 options

1 - keep paying the same amount , which will dramatically reduce the term (years) you have to pay the loan (ie you will pay it off a lot quicker) , or

2 - pay a lesser amount each week (fortnight or month , however you pay) but you wont reduce the loan from 28 years that way

Do you want a bit more money in your pocket each week now , or to pay your house off years sooner , I know what I would choose.

 

[BayView]

There are some mixed responses here. I guess Ill have to ask my bank manager what the deal is.

I dont see why if i drop 50 gs in my mortgage, considering there is still 28 years to go on my loan and i dont want that to change, I should be paying a lesser amount every month.

Thanks for your help guys.

If you are coping with the current repayments without any probs, I'd be continuing with the same amount. You don't have to change the repayments if you don't want or need to.

This will shorten the loan term by several years and several tens of thousands in interest.

 

[steveadl]

There are some mixed responses here. I guess Ill have to ask my bank manager what the deal is.

I dont see why if i drop 50 gs in my mortgage, considering there is still 28 years to go on my loan and i dont want that to change, I should be paying a lesser amount every month.

Thanks for your help guys.

I think the answer your looking for is; no, the bank won't adjust the repayment down automatically. It's up to you to contact them and say you want the monthly repayment brought down into line with the new balance.

Easily done, but it won't happen automatically for you, no.

 

[phil46]

There are some mixed responses here. I guess Ill have to ask my bank manager what the deal is.

I dont see why if i drop 50 gs in my mortgage, considering there is still 28 years to go on my loan and i dont want that to change, I should be paying a lesser amount every month.

Thanks for your help guys.

Hi DanielG,

I thought you had made up your mind when you created the title of this thread in the first place. The extra $50K would allow you to pay off the mortgage sooner. Assuming, you are on an offset account and you keep repaying the same amount as before.

 

[Aaron Sice]

you will have 2 options

1 - keep paying the same amount , which will dramatically reduce the term (years) you have to pay the loan (ie you will pay it off a lot quicker) , or

2 - pay a lesser amount each week (fortnight or month , however you pay) but you wont reduce the loan from 28 years that way

Do you want a bit more money in your pocket each week now , or to pay your house off years sooner , I know what I would choose.

and while paying off your house years sooner is a great idea - it doesn't help cashflow for someone in a small business or who has found themselves strapped for cash between paydays.