How Does A Mortgage Work?
We all know how difficult it can be to apply for a mortgage – understanding how these loans operate. There are two- basic types of loans – those that are secured and those that are not. Home loans, or mortgages are of the former type. That is why the banks allow such a long repayment term – should the loan not be repaid, they will sell your home in order to recoup their losses. Because the loan is fully secured, you pay a much lower rate of interest than would normally be the case – do not be fooled though, you will still pay plenty of interest.
Many people use their mortgages as a vehicle to get rid of their other debt, thinking that this “better” interest rate will mean that they will benefit. The problem with this theory is that yes, the interest rate is lower. Benefits of this lower rate are completely negated though when you repay the debt over the full term of your home loan. Consolidating debt into your home loan should be viewed as a measure of last resort.
Even at the lower rate of interest, you will not even start repaying the capital amount until the bond is at least a few years old – up until that point you are basically just paying interest and the capital will not decrease by much. The bond is designed as a vehicle to repay a large debt in an affordable manner. If you now lump in smaller debt amounts that were designed to be paid off in the short term, you will get yourself into trouble.
Even if you only pay an additional hundred dollars monthly, you are looking to save over one hundred thousand dollars in interest and can effectively pay your loan off three years earlier. If you are good at managing your money, you can be rather clever and use your bond as a type of savings account. You simply plug the extra money into it and then access when needed.
In the interim, the money is saving you on the amount of interest that you are paying. And the rate at which you borrow money is always higher than the rate which you will gain from an investment received. Put as much of your salary as you can manage into the bond and only transfer it out as and when you need it. Saving for a holiday? Use the bond to do this and be secure in the knowledge that your holiday savings are helping you become financially free as well. Find out how to use a mortgage loan calculator Lacve.
And, as an added bonus, there is no investment interest to push you into the next tax bracket. It makes sense to pay off your home as soon as you are able – pay off that bond and buy a second property to rent out and you will soon have the means to start growing your own portfolio.