Bernard Salt’s article in the Australian suggesting that young people should skip their smashed avocado breakfasts and use the money they save for a deposit on a house got me thinking – what about the people that already own their home (young or otherwise)? The deposit is only a small piece of the puzzle – usually about 20% or less of the overall cost. There’s still the other 80% that people spend the next 30 years paying off. How much are the smashed avo breakfasts costing them?
Let’s have a look at some numbers. For a $500,000 loan at a 4% interest rate, your repayments will be almost $2,400 each month, which works out to be a bit over $850,000 in total (or $350,000 in interest) over the life of the loan.
If you and your partner skip one smashed avo breakfast each week, that gives you an extra $190 each month to put toward your home loan (assuming you’re buying the same $22 breakfasts as Salt). If you keep adding that money to your loan repayments each and every month, that’ll shave off over $50,000 in interest and almost 4 years off your loan.
Especially in the early years of a loan where the majority of your minimum repayments are just covering the interest, every little bit can make a difference. In the example above, only $0.45 of every $1 of the minimum repayments in the first year actually goes towards reducing the loan balance, and the rest is just covering the interest. 100% of every $1 over and above the minimum repayments is going directly towards reducing the loan balance.
Don’t forget, we’ve also got historically low interest rates at the moment. If rates start climbing up again, an even larger portion of the repayments will be going towards covering the interest.
Of course there are other things you can do that won’t get in the way of your smashed avo breakfasts. There’s plenty of competition amongst the banks (and other non-bank lenders). If you can take advantage of this and find yourself a lower interest rate, you can save money without skipping a meal.
If you’ve got some money sitting around but you don’t want to limit your access to it by repaying the loan, think about an offset account. This can give you the freedom to access and use your money however you like, and you get the benefit of reducing the interest you owe to the bank while your money is sitting in the account.
Whether you want to consider cutting down on your dining out or not, there are things to consider that could potentially save you $’000s in interest on your loan.
Shopping around and researching lenders, costs, features and benefits can be a time-consuming and sometimes frustrating process. A mortgage broker can do the research for you, help you through the process, and it usually won’t cost you a cent.
If you’d like to discuss your loan options or café recommendations, feel free to get in touch.
Noah Cohen is a Credit Representative (Credit Representative Number 490277) of BLSSA Pty Ltd (Australian Credit Licence Number 391237).