September 1998 Volume 79  Number 9 "serving the protectors"
Police Credit Union

Home Ownership - at the Lowest Cost

For many people, borrowing money for their home is the largest financial commitment they will ever undertake. If you want to save money, and own your home sooner, there are a few easy methods to apply to make this happen.

Making higher repayments than required

The benefits of making higher repayments than necessary are best displayed in the following example. If you borrow $100,000 over 30 years, at the current market rate of 6.79%, and assuming this rate does not change for the full term, you will have a minimum repayment of $301 per fortnight. If the loan runs for the full 30-year term, you will repay $131,170.09 in interest.

However, no matter how minimal your additional contribution is to the loan per fortnight, it will have a profound effect on the interest you pay, and the term. Using the above example, if you voluntarily increase your repayment to $351 per fortnight, ie an extra $50, you will reduce the term to 20 years, and the total interest payable to $82,510.86.

Making lump sum repayments

If at any stage you can make additional lump-sum payments to the loan, this will also substantially reduce the interest payable and the term of the loan, especially if you do not reduce your required fortnightly/monthly repayment. Interest will calculate on the outstanding balance, while your repayments are based on the original amount borrowed.

Further to the previous example, if you borrowed $100,000, and repaid a lump sum of $5,000 in the first few months, by maintaining the minimum repayment of $301 per fortnight, the term will be reduced to just over 25 years, and total interest payable to $104,218.19.

Pay off the principal early

In the first few years of your mortgage, all you seem to be paying is interest to the financial institution with very little reduction in the principal. The key to avoiding this is to try to pay off as much of the principal as early as possible, which may involve drastically reducing your spending habits early in the life of the loan.

Hedge your bets

Many financial institutions offer "combination" loans. This allows you the security and peace of mind of locking a portion of the loan in at a fixed rate, while giving you the flexibility of floating the balance at a variable rate to take advantage of rate reductions.

Match your loan with your needs

The majority of home-loan products offer many features that provide the borrower with ease of access and flexibility. However, when evaluating which home-loan product is best for you, make sure you compare the products on offer. For example, some financial institutions charge penalties for lump-sum reductions, or for additional repayments. Also, remember the cheapest rate may not be the best. A monthly service fee on the mortgage does effectively add to the base interest rate quoted.