The simple tip to save you thousands
I once worked with an Englishman, a Croatian and a Dutchman. They had been in the finance game a long time.
True to stereotypes, each one of them imparted a cultural truism that has helped me build what I have today.
The Brit showed me that charm and wit would help you win over even the toughest client, loan assessor or insurance underwriter.
The Croat showed me that everybody needed to be sold, clients, colleagues and managers alike.
The Dutchman, a guru on all things money gave me the best advice about accumulation.
Pay more, more often.
The Dutchman's advice, when you think about, makes perfect sense:
- If you want to save up for your dream holiday: if you “pay more, more often” into your savings account; the money you need to take that trip will be there sooner.
- If you want to get rid of your credit card debt, by using the mantra of “pay more, more often” the balance will decrease very quickly and it will soon disappear.
The same applies to your mortgage.
A common question I am asked is, “If I change my payments from monthly to fortnightly, I will pay my mortgage off faster, right?”
I always answer, “No, not quite.”
And before I can continue, I always get the interjection, “But I read that if you pay your mortgage fortnightly you will reduce your term and save heaps in interest!”
My answer to this is, “Only if you pay more, more often”
Let me explain:
By making your mortgage payments more frequently e.g. fortnightly rather than monthly, you can pay off your mortgage faster and pay less in interest overall.
However, you do this by not setting your repayments at the minimum fortnightly level, but by halving the monthly repayment and paying that amount fortnightly.
Because there are 12 months in a year but 26 fortnights; you will end up paying an extra 2 payments, equivalent to an extra month, every year.
For example, if you have a $350,000 mortgage, making fortnightly payments of $1,100 rather than monthly repayments of $2,200, you’ll pay $2,200 extra each year. By doing this, you could take four years off the term of your home loan and save you around $57,000 in interest!
It’s not magic, all you are doing is working on the mantra of “pay more, more often”. So if you take the Dutchman’s advice, you could still pay monthly, but just add an extra 1/12 of your repayment amount on each month and you will achieve the same result.
If you've missed the trick that was promised in the headline, you like most people have overlooked a very key point when it comes to accumulating savings or reducing debt.
Just by working to the mantra “pay more, more often” you will achieve your goals faster.
Perhaps you want to know how to get the best interest rate on your home loan? Check out Interest Rates: Danger in the discount.