Blog #11- Should I Overpay My Mortgage? Hell Yeah!

Blog #11- Should I Overpay My Mortgage? Hell Yeah!

Hi All,

Thanks a mill for checking out this latest blog.

I'm not sure about you guys but spare keys seem to go missing all the time, much like socks! So yesterday I had to go and get 4 spare keys cut, a job I do at least every 2 years. When I asked how much  each key was I was told €8. Now I wasn't sure what the going rate was for a spare key but I'm all about getting value, as I believe we all should (more on this in a future blog). I then simply asked the guy 'Can you do any better on the price?'.  He then reduced the price immediately and contentedly to €5 per key! A saving for me of €12 with one question, and everyone was happy!

Speaking of savings (dodgy Segway time!) this week we are taking a look at the impact of interest and compounding on that beloved thing called a mortgage! The level and number of these home loans one had was once (not too long ago) considered a measure of your success in this country. An implication that the more you owed the more successful you were! Not sure that this perception still exists today!?

Never let it be said that I am not a believer in mortgages, they are fantastic ways in which to enable one to purchase a home, to put down roots, and provide shelter for oneself and their family.

key cutting1

Cut your key to suit your lock!

Having said that, it is often an eye-opener for people when they see the impact of an interest rate on their mortgage loans, and the amounts they stand to repay if they leave the terms as they are and plod through it.

Just as we saw in Blog #8 (Click Here) the impact of interest on a lump sum you hold over a sustained period of time can be massive, the same can be said of a lump sum you owe! Lets take a look at how much an impact it has.

Scenario A: You see the house of your dreams, it's priced at €230k. Lets say you need to borrow €200k, and you do so over 30 years, at a generous rate of 3.5%. All very sensible!

Over the course of that mortgage, if you repay it over the given term and the rate stays at that level (unlikely), you will repay the €200k, along with €123k in interest. Borrow €200,000 and repay €323,000.

Scenario B: (Spot the difference!) You see the house of your dreams, it's prices at €230k. Lets say you need to borrow €200k, and you do so over 20 years, at a generous rate of 3.5%. All very sensible!

Over the course of that mortgage, if you repay it over the given term and the rate stays at that level (unlikely), you will repay the €200k, along with €78k interest. Borrow €200,000 and repay €278,000.

So what was the difference between Scenario A & Scenario B?? 10 years shorter, and €45,000 less to repay! The figures are even more stark if your rate is above this level.

keys 3

 

Scenario C: There is a lot of folk reading this who have a mortgage already, and don't want to hassle of altering terms etc.

Taking a similar example you owe €200k and there are 30 years remaining, at 3.5%. You repay just under €900 per month towards this on the regular T&Cs. Perfectly normal! Check out this........

Regular Payment (approx €900pm) €300 Over-Payment (approx €1200pm)
Amount Borrowed €200,000.00 €200,000.00
Year Balance Balance
1 €196,164.00 €192,505.00
2 €192,191.00 €184,744.00
3 €188,077.00 €176,706.00
4 €183,816.00 €168,383.00
5 €179,404.00 €159,762.00
6 €174,834.00 €150,835.00
7 €170,102.00 €141,591.00
8 €165,202.00 €132,017.00
9 €160,127.00 €122,102.00
10 €154,871.00 €111,834.00
11 €149,428.00 €101,201.00
12 €143,792.00 €90,189.00
13 €137,954.00 €78,785.00
14 €131,909.00 €66,975.00
15 €125,649.00 €54,745.00
16 €119,166.00 €42,079.00
17 €112,452.00 €28,963.00
18 €105,499.00 €15,379.00
19 €98,299.00
€1,312.00
20 €90,842.00

 

You will see from above chart that by sticking to the agreed payment, after 20 years, you will have 10 years remaining, and just over €90k outstanding to clear. If you had paid €300 per month more than the agreed amount (which most banks will facilitate quite happily- certain fixed mortgage excluded), you will be mortgage free within 20 years.

Antique skeleton keys with wood background.

Your keys to the kingdom!

Moral of the story is, if one of your financial goals is to be financially free by mid 50's, for example, yet your mortgage is due to continue till you reach 65, there is proactive action you can take which will help you reach your goal, and save yourself a lot of interest in the process.

Please share the love or send a link to anyone you know has a mortgage, and could do with an eye-opener!

Thanks for reading.

Paddy.

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