When we track something we pay more attention to it.
When we pay more attention, we optimize.
When we optimize, we win.
Last post I promised you some of the best ways to do truly untold damage to your mortgage but because it is so important I’m just going to come out and say it again.
Tracking your mortgage is the linchpin to mutilating it.
Tracking will remind you, encourage you and (at least for me) get you addicted to paying down your debt. And what better way to track something than with a spreadsheet. Now I have always used Google Drive (used to be Google Docs) for my tracking purposes as it allows me to share my mortgage tracking numbers and results with DW. Whilst she adores the pretty graphs (I actually have a “Pretty Graph” tab) she doesn’t like to get too much into the nitty gritty numbers crunching part so having her able to see everything whilst not having to get involved means we’re both in on the goal 100%. With all that said though don’t let signing up to Google be a mental barrier to you, if you’re not a Google fan, just keep a good ol fashioned Excel Spreadsheet.
Now again, this spreadsheet doesn’t have to be complex but I want to delve into the more specific details surrounding mortgage spreadsheet tracking. To start with, I’d suggest something similar like I showed you in my last post. (UPDATE! Use “The Spreadsheet“!)
As you can see, each row increments by one fortnight. This leads us to our first way of mutilating your mortgage: make sure your mortgage repayments are fortnightly. They can be weekly also, but for the love of God make sure they’re not monthly. This is often the default option with banks but it won’t be for you anymore.
When you leave your mortgage on monthly repayments you go two full weeks where your loan is higher than it should be. This means that your debt level is higher for longer each month and you incur more interest… again and again and again for the life of your loan. Now this extra amount of interest isn’t THAT much (for the example below each year you’d save $32.70 in interest*), but you may as well not pay it if you can help it. The main benefit is that it also just so happens that when you make fortnightly payments, you make 26 in a year whilst with monthly payments you only make the equivalent of 24. This quirk ultimately boils down to you paying more towards your mortgage in any given year and can take a sizeable piece of flesh out of your mortgage, so lets hit up an example with a “standard mortgage” at least according to NAB…
Mortgage Amount: $250,000
Interest Rate: 7.50%
Loan Term: 30 Years
So in this example you can see that simply by changing the repayment frequency to “Fortnight” we have already hacked $104,265.63 off our loan and 7 years.
Yup. $104,265.63. That is a number that’s pretty unimaginable to most so let me spin off a few things you could do with those savings:
– Fly from Australia to Europe about 52 times
– Buy 3 brand new Holden Commodore SV6’s
– Buy 75 brand new Ultrabook Laptops
– Buy 32 brand new Sony 55″ LED TV’s
and so on…
Now to get this result all I’ve done is find out what the monthly repayments are for this standard loan using the NAB Home Loan Repayment Calc. If you load that up you’ll find out that it’s $1,748.04. If we half this value (as there are two fortnights in each month) then you get the $874.61 value (technically it’s $874.02 but close enough). From here I’ve reduced the Loan Term down until the fortnightly repayment figure matches our calculated $874.61 value.
This method (as said above) is technically flawed a bit as there aren’t really two fortnights in each month (there’s a few extra days here and there). Because of this, you see a different amount paid over the course of the year:
When you choose “monthly” at $1,748.04 you end up paying: $1,748.04 x 12 months = $20,976.48
When you choose “fortnightly” at $874.61 you end up paying: $874.61 x 26 fortnights = $22,739.86
This extra amount you pay into your mortgage each year is why you save all that interest and time stated above. Now you might not fully understand all this voodoo math magic as I’m sure many have explained it far better than me before, however you don’t have to. All you need to understand is to make sure you pay your mortgage repayments fortnightly or weekly or I will slap you.
Here are the four major banks phone numbers. Pick up the closest phone to you and call them NOW. No not at lunch, not tomorrow or “on the weekend”…NOW! Unless you’re about to be taken to hospital for a quadruple by-pass heart surgery and can’t pick up the phone as your left arm has gone numb due to the improper blood flow call them NOW!!! All you then have to do is repeat what’s written down below to the person on the other end. If you’re not with any of the big four banks, go to their website and get their number.
ANZ: 13 25 99
Commonwealth Bank: 13 22 24
National Australia Bank: 13 13 12
Westpac: 132 558
Hi there, I’d like to make sure that my Home Loan Repayments are set to Fortnightly please.
That’s it. That’s all you have to say to your bank to save hundreds of thousands of dollars. No packing lunches, no painstaking penny saving… just 1 phone call. [5 minutes]
If you’re already on the Fortnightly Payment bandwagon then awesome work! If you weren’t though first make the call and then try and calculate how much this simple step will save you over the life of your loan and leave the results in the comments.
* To calculate this I’ve simply taken the amount that’s taken off the loan amount each fortnight ($874.61), figured out how much interest is saved per year due to this being paid 2 weeks earlier and then halved it (because you only get that advantage for half of each month).
$874.61 * 0.075 (7.5%pa) * 0.5 (half of the year only) = $32.70