Effects of paying Extra Principal repayments at the Beginning of the lifetime of a mortgage

Pretty sure compounding has an effect here but i think in this case, it's more about negating the effect of Amortisation and the fact that the bank is trying to recoup it's interest as quick as possible.
Hence why paying that same sum from above at the end of the life of the loan as per scenario three won't generate the same savings

 

Read somewhere that on a 25 year P&I mortgage the banks gets most of the interest money from you by around year 10. In the order of 60% of the total interest payable. After that they commence to really claw back the capital.

 

On a 25 year P&I loan you are paying more interest than principal each month until month 176 - ie 14.7 years



On a 30 year P&I loan you are paying more interest than principal each month until month 283 - ie 23.6 years




Principal and Interest Calculator | Amortisation Calculator | iSelect



Extra Repayments can make a significant difference to the total amount repaid and the total time taken to repay... If for example you started paying an extra $500 per month (6K per annum ) onto a 25 year 4% P&I mortgage , you'd pay down the mortgage in 197 months... or 16 years and 5 months- this knocks 8 years and 7 months off the 25 year loan term and saves you @ 65.7K






If for example you started paying an extra $500 per month (6K per annum ) onto a 30 year 4% P&I mortgage , you'd pay down the mortgage in 220 months... or 18 years and 4 months- this knocks 11 years and 8 months off the 30 year loan term and saves you @ 92.4K

 

Thanks.

The case I saw was working on the assumption that on a cumulative basis by year 10 a person would have paid around $105k in interest where the total amount of interest for the entire loan was approximately $175k so 105/175 = 60%. The numbers could be wrong though. Fortunately for me I'm not in the market for a loan as I'd likely get the info upside down.

 

of course you save more paying at the beginning of the loan because
of compounding on a bigger number, simple maths

every dollar paid down reduce the compounding effect

the higher the number the better the return
4.5% compounding interest on 200K is far better than one at 100K

 

@euro73

Any insight into if it is still worthwhile making extra repayments into the loan if the interest is tax deductible and instead invest the extra repayments which would generally generate a greater rate of return (compounded) than interest rate of the loan (not compounded). Assume taxpayer is earning slightly above average income.

Cheers,
Oracle.

 

ts not so much about the return of each dollar, but the opportunities debt reduction opens up through improved access to equity and borrowing capacity....

if you have no further need for future borrowing, debt reduction may not be your best way forward....but if you do, it seems the prudent way to go.

 

Assuming nothing else changes if I repay say $50,000 of loan how much does that improve my borrowing capacity? Is it going to be greater than $50,000?

Cheers,
Oracle.

 

Is that $500k pm after or before taxation ?

 

Depends on the lender the loan is with and the lender you're applying too. In most cases however, it's like-for-like.

By that I don't just mean the amount, the type of loan is important as well. Paying off $50k in non-deductible debt will give you marginally better than $50k of capacity if you're borrowing for tax deductible purposes.

 

Understand.

I was mostly referring to the example in the previous post where the assumption was loan is tax deductible and you could potentially invest the extra savings somewhere else which has a higher return than the loan interest rate plus returns are also compounded.

So in absence of being able to borrow more money than money use to repay the loan I really don't see good enough reason to repay the loan. Correct me if I am wrong?

Cheers,
Oracle.

 

After tax. 500k before tax is for scrubs.

 

There's a bit more too it than just serviceability.

Consider that you could pay down $100k of debt costing you 4%. You save some money.

Or you could invest that debt in the share market for a 6% return. You're 2% ahead and you're going to have to pay some tax on that return, so probably doing better than paying off the 4% loan, but not that much better. You might do some debt recycling and only pay tax on the difference of 2% to make this work better for you.

On the other hand, if this is a question of best use of money, rather than serviceability, you could take that $100k and use it as a deposit (leverage it) into a property. $100k becomes a 20% deposit and purchase costs on a $400k property.

If that property then increases 5% next year, you've taken $100k, your net increase from investing the $100k is $20k, which is a 20% return.

Lot's of speculation and plenty of things to poke at, but it illustrates why we borrow to invest rather than pay debt off.

 

Hmmmm.... this is a compounding affect, just not in the way it's normally understood or applied.
I'm too lazy to write it out mathematically right now.... something about principal sum X % X time = reduced interest...... you'll see it soon I'm sure

 

Agree. As many on PC can vouch for, I spend that much each month on good red wine .

 

Ahhh, a man of my cloth.

 

One other thing that's been on mind was the percentage of Interest and principal of each repayment and how that changes over the lifetime of the loan. Pretty interesting relationship between time of loan and interest at the beginning of the lifetime of the loan:

Longer loan period means a larger interest part at the first payment.
Higher Interest rate means a larger interest part
Loan amount makes no difference in percentages below as long as Loan period and interest stay constant.

Charts below shows the difference when we change the loan period (disregard the $ please):
500K loan at 4.5%

Interest part % at first payment : 73.30%

Interest part % at first payment : 66.73%

Interest part % at first payment : 58.54%

 

I saw a video a little while ago that suggested getting a $10k credit card, paying $10k straight off your mortgage, then paying down the credit card debt as soon as possible. Once you'd paid it down to $0, repeat the process. The theory was it reduced the effects of amortisation. I dont know enough about it, but would be interested to hear any thoughts?

 

If the CC was interest free it would have benefits. They could be outweighed though if you aren't able to pay it of asap.