The Tip: Pay one mortgage payment extra every year to save money

Paying one additional mortgage payment each year, whether in a lump sum or monthly increments, can lower a 25-year loan down to 15 years.  If you pay more than one extra payment, the number of years will decrease even more.  Since this additional payment will be applied only to the principal and not the interest, you end up saving thousands and thousands of pounds on the Total Amount Repayable

This is a good idea if…

You have the spare money and a flexible rate mortgage. A mortgage is by far the biggest financial burden most people take on in their lifetime (apart from taxes!) and if you can reduce the time it takes to pay this down, you will be far better off in the long run. And if you are a long term planner with good financial discipline then this would be a good idea..

However…

In the current financial climate it might be a better idea to pay off any debt that carries a higher interest, like car loans, home improvement loans and credit cards and store cards. The store cards usually have the highest interest rate so you may want to pay those off first, then the credit cards and so on.

Paying off your credit cards also means that you would be able to use the money available on your credit card should the need arise, where as most mortgage products would not let you have your money back.  Having an available line of credit (lots of money available on your credit card) is also good should you suddenly find yourself jobless.

If you read any site offering debt management advice they will without fail tell you two things you need for getting out of debt; you need a budget and a get out of debt plan.

Perfectly sound advice which is well worth listening to, but how easy do you think it is to plan for it if you have lots of  debts and lots of other things you want to save up for?

Well it is all about perspective and I’ll tell you all about it.

Planning your finances when you are in the red and have more debt than a 3rd world despot can be quite daunting. It’s bad enough having to deal with the debt that you have to pay off but if you for instance have to buy a car or want to go on a great family holiday, that can be a hard thing to cope with.

Sadly it is the truth that it was your own overspending that put you in that place, but how can you turn the desire to get a new and more economical car into something motivating when you have 4 or 5 lean years of hard saving simply to pay back the debt, ahead of you?

That is where the perspective comes into force. Your debt free day may be years away. But the way to bring it forward is to earn more.

There are 3 things that are relevant in this situation. How much you owe (or want to save), the time frame and how much you can set aside every month to reach your goal.

My wife is saving up for a big wedding for her daughters (my step kids) so lets use that as the first example.  Basically the timeline is fixed and so is the amount of money she needs to save.   In situations like this your perspective is simple – in order to save up enough in time for the big day you have to save a set amount. So if you have to save £900 in a year and a half you must set aside £50 per month.

The second example is my need for a new car. If I want to have say £3000 for a car deposit, then my perspective is a little different. The two things I have to work out is if there is a deadline.  If I want to buy within a year, then I have to find £250 a month to set aside just for the car.  If I can only afford £50, then I have to wait 5 years – this is my second perspective.
Are you familiar with snowballing your debt payments? Basically this means you pay off minimum payments on all your debts except your most expensive one. All your spare money goes to pay off this most expensive debt. When this is paid off you move on to the next debt and pay off as much as possible on that.

If you take it a bit further you can add your savings plan to your “snowball” and save up massively once you have paid off your debt.

Patience is required for this approach but the reward is that you will be going on that holiday, paying for that debt or driving in that new more economical car without any debt what so ever. And what could be better than that?

“Paying one additional mortgage payment each year, whether in a lump sum or monthly increments, can lower a 25-year loan down to 15 years.

If you pay more than one extra payment, the number of years will decrease even more. Since this additional payment will be applied only to the principal and not the interest, you end up saving thousands and thousands of pounds on the Total Amount Repayable.”

Only do this if you can afford it. If you’re already short of cash, paying off your mortgage faster doesn’t make sense.

Do your budget planning and make sure you can handle the reduced disposable income before you go ahead.

If you have other debts that charge a higher interest, you are going to be better off by paying those off first.

At the moment I am snowballing an overdraft and 2 credit cards and I am not doing the 13th month until those 3 are cleared up. I use my 13th mortgage payment to actually pay these off faster. I use the monthly increment and add it to the snowball payment.

If you have all the money you need, then this is a great money saving tip.