As  read in the Courier Mail, paying more than the minimum amount off your mortgage can save you hundreds of thousands of dollars over the term of the loan. And with interest rates at record lows the potential to save is even greater. So if you are one of many homeowners choosing to pay just interest on you loan think how much it could cost you in the long run.

Do the sums

On an average $300,000 loan you would need to pay $1572 a month in principal and interest to pay off the loan in 30 years. Paying just interest, the variable rate repayments reduce to $1315, leaving an extra $257 a month in your pocket.

But these loans are really not viable long-term options for the average property buyer because they don’t help you earn an asset.

“Principal and interest loan are designed to allow you to pay down the debt so at the end of the loan you are debt free and you own the property outright.”

The best option, while it may seem harder in the short term, is to make more than the required repayments on your loan.

Taking the same $300,000, 30-year loan, if you pay an extra $50 a month on top of the required $1572 for interest and principal, you will save $20,200 and pay the loan off almost 2 years earlier.

Paying an extra $100 a month will save you an extra $37,400 in interest repayments and the loan paid off 3 years and 7 months earlier.

Paying interest only

Pros

-Frees up more cash and can be useful if your household income changes for instance if you lose your job or have a baby.

-Make your monthly repayments lower

-Allows you to invest the money elsewhere

Cons

-You will never pay back the home loan debt

-You will not build a buffer if interest rates rise in the future

-You don’t get any tax benefits

John can be contacted on 0749722081 or 0410433919. or email him at jwhitten@ihl.net.au or net www.ihl.net.au. John Whitten is a credit representative (CRN 399796) of BLASSA Pty Ltd (Australian Credit Licence No 391237).