The first payment

Home loanThe first automated payment to my home loan went through yesterday, along with the first interest charge. As one might reasonably expect, but I had not previously quite appreciated, in one fell swoop the interest charge wiped out around 85% of the payment. Were I a more emotional person, I might have screamed in anguish when I saw that on the screen in black and white. No wonder the bank fawn over me.

This ties in with what I’ve been told many times: the more dosh you can pay into the home loan, particularly in the early years, the better. A quick fiddling with a spreadsheet seems to indicate that if I can get an extra 50% onto it every month (which I would not expect to be particularly comfortable, but equally not impossible) I would be clear of the debt by 2019 (when I will be a spritely 49-year-old) rather than in 2033 (by which point I will be an aging 63-year-old).

Not only that, but the interest I would save would be (wait for this) in the region of a whopping two hundred and fourteen thousand dollars. It sounds just as impressive if I write it in numbers, look: $214,000.

Maybe I should eat bread and cheese for the next ten years.

Perhaps not. But it does make me think that maybe I’ll hold off on some of the less urgent purchases I had planned.

<CheapskateMode>

  • Stove and oven — ancient, but workable. I might be willing to put up with them for a bit, postponing until a later but more thorough kitchen renovation is necessary.
  • Surround-sound setup — who needs 5.1 speakers when you only have 2 ears?
  • Kitchen table — bah humbug, the current one fits. Just.
  • New desk — okay I’m torn here. The current one is pretty damn ugly, and really doesn’t suit the room at all.
  • and filing cabinet — ditto. Though maybe I can hide that in the back room.
  • Couch — No getting around this one. It direly needs replacing.
  • Rugs — I wonder if it’s possible to get something not excessively horrible at one of those endless rug sales they keep advertising on the telly?

</CheapskateMode>

Actually, some of this stuff would be good to have soon. I’m sure there’s a balance to be found between spending up big and paying off the loan fast.

I’ve also got the income protection people chasing me with a proposal. I have to admit that the prospect of money for my kids if I fall under a 703 is inviting, though the premiums aren’t. After all, if the worst happened, they’d get my (fairly healthy) superannuation, right? The key would be to ensure that the house increases in value, so they wouldn’t also get saddled with a big debt.

Tell you what, I’ll be getting my bond back from the old place in a few days. As soon as that lands in my bank account, it’s going straight on the home loan.

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19 Replies to “The first payment”

  1. I work for a home loan company and my suggestion would be for you to pour in as much money as you can off your home loan then if you ever need any urgent purchases take the money out via redraw. At least while it’s in there it is saving interest and better to use that money rather than taking out additional loans for whitegoods, etc. Some of the refinances we see are mind boggling when you look at the debt which people can accumulate on credit cards, etc. Also, pay as frequently as the bank will allow as that is going to reset the balance for interest charges every time a payment is made and although it may seem like it is going to take forever there is a hell of a lot of difference between interest for 14 years vs interest for 25 or 30 years.

  2. Oh and I just have to tell someone this. My new house is new – never been occupied b4. Sunday morning woke to big bang, could not find source of gushing sound, turned off water – it stopped, called out plumber who tried unsuccessfully to gain access to pipe under house from outside, gave up and broke the news to me that he would need to saw through my beautiful, brand-new, shiny jarrah floor boards to gain access, I sat outside while sawing occurred because it was all too much too watch this destruction taking place, plumber located burst thingumyjiggy, plugged it off and has promised floors will be reinstated. Just goes to show that you can never count on when you are going to incur unexpected household repair expenses. BTW, insurance company doesn’t cover burst pipe because it didn’t actually cause any structural damage!

  3. You could do a few of these ‘new’ things on the cheap. THe desks we have are from Target and were around $80 when we got them. They are the ‘put it together youself’ type gig, but they look nice. Maybe Ikea would have something similar in style and price.

  4. ‘Scuse my french, Daniel, but fuck me gently with a chainsaw. $214,000 INTEREST??!!? And that’s what you’re SAVING? You mean there’s MORE?! No way. kay. Colour me forever scarred and never ever buying a house. Ever. Never.

    I will rent for the rest of my life, at least I know the money isn’t ending up in the bank’s hands. And even if it is, I don’t know about it. Ignorance is bliss.

  5. Not sure if I said this last time you mentioned the stove. But if it looks like it is a cast iron job, and I think it did look like that in the picture, you should try making a roast, casserole, pudding, cake, or pizza in it. You may not want to get rid of it after that.

  6. Similar to Lyn’s idea, but how about having 100% of your pay going into the mortgage and only redrawing living expenses?

    This is a line of credit, and if there’s no extra bank fees involved in setting it up, it might be worthwhile.

    Then get a credit card with a long interest free period and buy all your everyday needs on that (the only exception being big items where you can bargain them down by paying cash).

    Exploit the interest free period so that as much of your pay remains in your mortgage for as long as possible. The more this happens, the more interest you save. Then pay the credit cards in full a day before the interest free period expires.

    Similarly with bills pay on the due date and not before. A dollar’s expenditure deferred is nearly as good as a dollar saved, with the object being to hold onto money for as long as possible. The banks do it all the time (eg cheque clearing periods) so why shouldn’t we?

    Sussy, $214k sounds like a lot, but it’s nothing over the longer term. This is due to the time value of money and inflation (amounts we worry over now will be worth much less in 20 years).

    Unlike rent (which rises with CPI and thus incomes) mortgage payments stay constant. Thus people who took out a loan to buy a house 10 years ago are probably paying no more than renters are today. And in 15-20 years the buyer will be paying less. The difference is that the buyers have substantial equity in an appreciating asset, whereas renters have nothing.

    Note that Daniel has a good house in a good area, the population of Melbourne is growing and the rate of household formation is faster still. So the value of the house will appreciate over the longer term, while debt drops off (slowly at first, then quickly). Thus equity rises exponentially and after several years doesn’t even require big house price rises to happen!

    Consider a $400k house with a $300k loan. Assume a very conservative 5% appreciation, or $20k equity pa. Interest is roughly $20k pa. So even in the early years the buyer might break even. They have $100k equity at the moment.

    Fast forward 10 years. The house is now worth a bit over $600k. The loan is down to $250k. So equity is now $350k. Instead of owning a quarter of the house, the buyer owns over half. So the homebuyer has accumulated a quarter of a million just by paying the mortgage!

    In contrast, the renter, assuming they don’t have an alternative investment plan, has equity of $0, no security and still has to pay the landlord!

  7. I should have added that the $250 000 increase over 10 years is like saving $25 000 each year.

    How many people have either the discipline or the income required to save this amount each year?

    The answer is likely to be very few.

    But if the above principle is applied (whether it’s a home to live in or some other investment doesn’t matter very much), it’s not impossible for ordinary people to set things up so that their money is working harder than they are. In other words for the average capital appreciation on their assets to exceed what they bring in from work.

    It’s not perpetual motion, but it’s pretty damn close!

  8. As a recent first time purchaser of own abode (unit only not housey) I have a few sage words you may also come to look upon fondly; Trading Post, Op shop, Auctions, Ebay. All manner of goodies to be bought. (for example bought two comfy upholstered chairs only $25 for the BOTH and the guy delivered ’em… love a bargain) Enjoy you nest. Interest aside it is great isn’t it? yeah, knew it! :)

  9. Daniel
    I’ve seen you on the train/Richmond station a couple of times lately, and you don’t need a rug. A bit grey, maybe.
    Rog.

  10. I’m also about to buy my own place in about 12 months. That is my first place so I qualify for the first home buyers grant. Have already decided what I want that is a place in the city. Well that is Melbourne city. Must agfree with what others have got to say that being as soon as you can pay more off of the loan the better it is.

  11. Thanks for the advice all… already had some of that in mind. I’m certainly using the redraw, though cautiously as it appears to be $10 a pop if I take money back out of the loan. I’m also looking at the full interest offset option, which is $3 a month.

    Sussy, the figure quoted represents about 2/3 of the interest payable if I stuck with the default payments. Yup, it’s a helluva load of money.

    Roger: ha!

  12. Peter – my rent will never change unless I offer my mother more money. Hehe.

    Daniel – Still… eep. Mind you, I shouldn’t be surprised considering what I do for a living.

  13. Be glad you can even afford a home mate. I live in Sydney with a stay at home wife and 2 kids earning a decent wage but there’s no way in hell I can ever hope to afford even a flat here.

    Housing prices in Australia are obscene are regardless of the housing industries’ assurance it’s already gone as low as it can go, rationalists are still predicting a bottoming out.

    Housing will stay remain flat until it’s affordable by the masses and right now, you need a double income, high wage over 30 years to pay off even an average 3 bedder.

    It’s ridiculous.

  14. There’s actually an argument that paying more off the loan doesn’t in fact save you money. If you look at the concept that the loan principal (the amount you actually borrow) as a proportion of the value of the house starts out at 100% and diminishes over time as the capital value of the house rises, then paying off interest only becomes a viable option. It’s possible that if there’s a short term hit on the value of housing, you may wind up owing more than the house is worth, but over the longer term, this is so unlikely as to be basically impossible (good house, good area etc).

    By leaving the principal alone, you can pay it off purely by the virtue of the value of the house increasing. Sure, at the end of the term, you’ll still owe it to the bank, but by that time it’s likely that it will be closer to 60% of the value of the house anyway, and you could have been earning money on that, rather than socking it into your mortgage, where it’s effectively dead money.

    Of course, it’s a riskier option, but in terms of building wealth as quickly as possible, it can pay off in the shorter term. Particularly if you, for instance, take the money that you WOULD be paying off the principal and put it into an interest bearing account and use that to make more investments in real estate.

  15. I went to one of those rug sales at Jeff’s shed at the beginning of the year … “French” (I say that with an element of imposed scepticism) and reduced from $800 to $100-and-something (can’t quite remember) and I’m happy with my purchase. I took a cushion off the couch to make sure it didn’t clash terribly. And a friend, for an extra opinion. When the next sale is advertised, go at about 9pm and make sure you take Miss Marita!

  16. Your thinking is RIGHT ON as far as making additional payments on principal early. Even making a 1/12th additional payment each month can reduce a 30 year mortgage to something under 20 years.

    Watch those rug sales. They usually talk about prices that include matting (the under rug backing) which is almost always a very cheap material that is hardly worth the trouble to put in. You can save with rements or end of run pieces if you take the time to search them out. Look for good quality along with the price because you will probably have a good carpet for many years – like 10 if your living habits don’t tend to destroy it sooner. You are old enough that I wouldn’t expect that of you. A good carpet and mat not only affects the looks of your home but it adds to the comfort and insulation properties of your daily living. If you can’t afford to get the carpet you want with appropriate matting, mop your floors and wait until you can afford to buy it the way you really should. Buying something cheap and then buying something again to replace isn’t going to save you any money and you’ll have to put up with the inferior carpet until you can afford to fix the mistake.
    Dave

  17. Daniel, check whether or not your super already includes life insurance and some form of income protection insurance. Mine does, and it’s enough that paying for extra doesn’t seem like a good deal.

    If it doesn’t you may still have an option to get it through your super, and may find that they have a better deal anyway.

  18. Money’s all good, but I think it’s worth trying (hard) to find a balance between having an enjoyable lifestyle and paying the house off.
    The two aren’t murually exclusive IMHO.

    Who wants to live like a churchmouse when you might go under a 703 any tick of the clock :-))

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