Friday, November 25, 2011

Don't blow your windfall - not all of it anyway!

If you come into some money – a decent lump sum – maybe a lotto win or a tax refund or a win on the Melbourne Cup…. Don’t just spend it all at once.  Use some of it to pay off a lump sum off your home loan - it can make a big difference!

What about that Medicare cheque or Health Fund refund? If you paid for the treatment months ago and you haven’t missed the money put it straight into your home loan.

Here are a couple very rough examples:
  • A lump sum of $1000 during the second year of your home loan you will actually save you around $8000 in interest over the term of the loan and could reduce the term by 3-4 months.
  • A lump sum of $500 during the fifth year of your home loan could save you up to $6000 in interest and reduce the term by 1-2 months
  • A lump sum payment of just $100 made in the first year could save you over $800 in interest over the term of the loan
So no matter how small or how large the payment, it’s worth throwing all you can afford at your home loan. The emphasis is on “all you can afford”. Do not be temped to throw too much at your home loan. Do not leave yourself short – that has its own challenges and pitfalls, so do not over commit with lump sums.

This example is based an initial loan of $300,000 over 30 years at a rate of 7.5%. The savings are not exact and are designed to be nothing more than thought provoking. The scenarios are generic and do not take individual circumstances into account. You should seek independent financial advice before making any significant changes to your financial products.