I am currently in month three of my 20 year old mortgage bond. All else remaining the same, if I stick to the plan I got from the bank, a house that cost N$ 479 000 will end up costing me N$ 1 218 866. This is a whooping N$739 094 in interest. I would have just accepted this as a good deal because that is what everyone else is doing. But it does not have to end this way.
I have decided to change things up slightly. Maybe slightly is an understatement, I meant to say drastically. Unless you understand the power of compound interest rate, you will think I am really being crazy. Let me explain to you.
I got the house with a few defect so I took a year to decide whether I was taking the house or not. After a long deliberation and the contractor agreeing to work on a few things, I finally took it. If I had taken the house a year ago, I would already have made 12 month installments but because I delayed I was standing at payment number 1. So did a quick math, how much extra do I have to pay up in order to catch up with someone that took the house a year ago? You will be surprise that if I just make a top up payment N$6 658. 84 , my balance would be the same as if I had a paid for a whole year.
This is because the of the total N$61 167 payments that someone else have made, N$54 517 went toward covering the interest that has been charged on the loan. This is because the interest is calculated daily and your payment is soo small in relation to the interest being charged such that of the first payment that I made, only N$507 went toward reducing the N$479 000 I initially borrowed.
So what is my plan for this house if not pay for 20 years? I have decided that I will pay whatever extra penny that I get for as long as I do not need it. I had started a saving at old mutual a few years ago which I terminated to try and go aggressive on the loan. The payout I got although not too significant, I dumped it on the home loan and currently as we speak, my balance has reduced drastically to the balance I would have if I had paid for 9 years. Imagine 9 years? The lump sum was able to have such a huge impact because I am doing it in month three of the loan. Had I waited to do it in year 5, it would not have soo much of an impact.
If you do not believe me, get your statement of the car you have been paying for a year or a house you have been paying for 5 years and see how much money you have paid relative to the balance you still owe, you will be shocked.
My plea to you is unless you invest in time to understand the power of compound interest, you could just be making decisions that would make you poor instead of becoming financial independent.
If you are new to our blog, please check out the following blogs post relating to this article: