99% of the population have been taught that the lower the rate is the more you can save.
I’ll show you in this article that there are more important factors to a home loan than just interest rate.
This is one way you can save on your interest cost:
In the first 5-7 years of the life of a home loan the interest component is approximately 90% of cost of the loan in many cases. This means that every dollar you are paying towards the loan, 90 cents is being charged towards interest costs.
It is even worse in the first 2 years; with a $300,000 @ 8% you will pay over $52,500 of interest, only to have just $5,000 of Principal Reduction.
In the same example with the addition of a monthly $12 fee, you will pay over $53,200 of interest, $240 in account fees and have a Principal Reduction of less than $4,300.
The difference of the fee is nearly 12% loss in Principal Reduction alone.
To pay off you home loan faster you need to have a good debt management strategy that first and foremost is dependent on the loan structure, and your budgeting and cash flow.
One of the most effective ways to minimise the cost of interest in a typical home loan is to ‘Keep the daily outstanding balance of the loan at the lowest possible amount’
This strategy allows you to save on daily interest charges. For this example we’ll assume that your daily savings is around 80 cents/day that is $24/month or 24% more principal reduction.
So not having any account keeping fees and utilising debt reduction strategies you can have (12%+24%) = 36% more principal reduction and would have made an extra one monthly repayment in 3 months.
You are also starting with a lower loan balance the next month which means even more principal reduction.
Even if interest rate is higher for one person but effective use of debt management programs and cash flow together with good loan structure; allows you to pay your home loan quicker.
Relying on low interest rate alone is not a strategy; it is more like a recipe for disaster. We see many potential clients struggle with their loans for over 25 years, switching from one lender to another chasing low interest rate to find themselves getting into more and more debt. Chasing low interest rate will end up costing you more long term.
So the question should be how much is this home loan going to cost me not how much is the interest rate.
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