There are three ways to trick yourself into paying more… as absolutely painlessly as possible.
And wait until you see how powerful they are.
Trick 1: Pay fortnightly
Let’s assume for our exciting savings illustrations that you have a $400,000 mortgage and pay a fairly long-term average interest rate of 5 percent.
Your minimum monthly repayments are $2,338.
But here’s where a quirk of our Gregorian calendar can really save you. I’m serious!
There are 12 months in a year, but not double that number of fortnights, 24, but 26. Agreed?
Now, stay with me – that means that if you simply halve your required monthly repayment, and pay in this amount instead fortnightly, you will end up one month ahead each and every year.
Let’s put some numbers around it to bring home the huge bottom-line benefit from what works out to be a fairly small but – this is key in every debt-reduction strategy – regular overpayment of $90.
So you don’t pay in $2,338 monthly, you deposit $1,169 fortnightly.
And the impressive result is a saving of some $48,000… and debt-freedom 3.5 years early.
You could also try another almost-psychological tactic to trick yourself into paying more...
Trick 2: Round up your repayments
Your required repayments are, of course, still the $2,338 above. But you instead make this a nice neat number and round it up to $2,400 a month.
The mortgage-reduction result?
That $62 extra you have paid in month after month has the impressive effect of getting you out of debt one year early and $17,167 more cheaply.
Yes, in these strategies you are dipping into your pocket for higher repayments. But only a little bit higher… a lot. In other words, all the time.
But this is the really big one – what I call the mortgage-busting masterstroke…
Trick 3: Up stumps but still stump up
The fact of the matter is that though a 5 percent interest rate has not been uncommon for mortgage holders in recent years, it is still possible to get one down at 2.5 percent.
Yes, that can represent an instant saving.
But in the spirit of getting debt-free quickly, let’s say you refinance to that more competitive 2.5 percent and keep your repayments the same. Remember, this is simply the level of repayments you are already used to.
I call this strategy: ‘up stumps but still stump up’. And it can give you immense interest rate relief overall.
On our model $400,000 mortgage, you save $206,414 and shave seven years off your loan.
Is it worth dipping into your pocket that tiny bit more for mortgage-freedom?
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me and an independent money educator across Australia’s newspapers and websites, and radio and television programs.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the policy or views of Unloan. The article is provided for general information and have been prepared and provided without considering any person’s financial situation, needs or objectives. You should consider their appropriateness to your own situation before making any decisions.