Ask Paul: Does this viral money tip actually work?
Dear Paul,
I saw a post on the internet recently that said, 'If you pay a month's extra repayment of your mortgage every year, your loan will reduce from 30 years to 17 years'.
Is this correct? I am 45 years old and recently started a 30-year, $500,000 mortgage.
I would like to retire mortgage-free when I am in my early 60s. - Katrina
I wish this was the case, Katrina. Like so much 'information' on the internet, it is a great attention-grabbing headline but, unfortunately, it is just not true. But your goal is still well within reach. Let's take a look at what you need to do to be mortgage free at 60.
This gives you about 15 years. What I'd like you to do is to go to your lender's website - they all have a mortgage repayment calculator these days. If not, do what I have done and go to any major bank's website.
I don't know the rate of interest you are paying, so I have gone with a standard rate offered by our big banks. Hopefully you have shopped around and have a better rate than this, but I think this will be a good guide. I'll use 6.3%, which has a monthly repayment of $3100. Let's now add an extra month's repayment, so about $260 a month.
With your $500,000 mortgage, this cuts nearly six years off your term.
It certainly helps but does not let you achieve your goal. To bring your mortgage to a zero balance in 15 years, you'll need to add $1200 a month. Obviously, if rates fall, getting the loan paid off will get a lot easier.
An extra $1200 a month is quite a whack. I know it may not be possible for you at the moment, but get started with what you can afford. I'd recommend you use an offset account - this way you can access your surplus payments if needed.
What I find is that as time goes by, our lives and finances change. You may earn more, interest rates may go down, meaning more of your repayments reduce the size of your loan, not just
pay the interest.
Our lives are rarely static, so while I am sorry that one extra month's repayment won't do the job, I am confident that if you get started with additional repayments now, even if not the $1200 required, over time you will be able to get to a zero balance in your early 60s.
Get stories like this in our newsletters.
