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Getting Rid of Your Mortgage
By Hamish Patel A lot of people get a mortgage and pay the
required amount until it is paid off. But these days most lenders offer a
revolving credit or flexible home loan. This type of loan lets you make
additional payments without a penalty and best of all, lets you take back
those extra payments should you need it in a hurry. Comparison between a standard mortgage and
one with a revolving credit component - (Note the minimum payments stay the
same) $300,000 Min monthly payment of $1,798 and
rate of 6%pa = Total interest cost $347,514 but utilizing surplus cash in budget of $351 per month towards reducing revolving credit balance =
Total interest cost $215,830 An estimated saving of approx $100,000 I have been working with clients over the
years helping them to get into mortgages. But surprisingly I have found very
few lenders who sit down with a client and go through cash flow projections.
Also what is interesting is that most clients will jump into a mortgage
without preparing a budget. A lot of people focus on the payment and if they
feel they can make it, jump right in. The first thing you should do when getting a
home loan is to prepare a budget and breakdown all your expenses. Figure out
how much you will have left over after paying all your bills including
entertainment and your mortgage repayment. Don't forget to add in an
allowance for that holiday or car. The second thing you should do is ask how
much interest you may end up paying over the term of the loan. Deciding on the structure The surplus figure from your budget will give
an indication of how much you can make in extra repayments, this will help
you decide how much of your home loan you should leave on a revolving credit
or flexible facility. For example lets say after all your bills you have
$200 left over per month or roughly $50 per week or $2,400 per annum and you
decide you want to fix your home loan for 3 years. Now $2,400 times 3 is
$7,200, so in effect you think that in the next 3 years you can make $7,200
worth of extra payments, great. Ok lets also say you have another $10,000 in
savings that you want to keep as emergency funds and not as a deposit. I
would then suggest that we place at least $17,200 of your home loan on a
flexi facility or a revolving credit. The important thing here is that should you
need to use $12,000 for an emergency in 2 years time, you really need to
have access to it, without asking for another loan. A home loan on a
variable rate will let you do this if it is a revolving credit home loan.
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