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Tips for Reducing Your Mortgage Tenure and Interest Rates

28 April, 2013



If you’re like most house owners out there, your home is probably being propped up by a hefty mortgage. Banks are clever people and they have built a system where additional payments every month will not help to reduce your loan and interest payments. So, what’s the best way to reduce your mortgage and interest payments?

By prepaying down your mortgage. Read on to understand how it helps you reduce your home loan.

How Prepayments Can Save Mortgage Interest

Prepayments are essentially a lump sum of money that is paid directly into your loan account above the normal monthly installments to offset the principal. When you prepay, your principal amount is reduced and hence, the interest should be reduced correspondingly. Depending on your financial loan terms, you have the option of opting for reduced monthly installments or a reduced tenure as a result of the principal reduction.

Check The Terms Of Your Loan Agreement

However, before you decide to prepay your mortgage, do check your loan agreement to see if there is a clause which prohibits you from making a mortgage prepayment. Most loans will not allow prepayments to be made in the first 5 years of the loan when the interest portion is highest. In some cases, certain loans may not even allow prepayments to be made which works very much against your favor as you have no means of reducing your loan principal amount.

How To Do A Mortgage Prepayment

Before you prepay your loan, ensure that you contact the bank to inform them that you are planning to do a prepayment. Some banks may require at least two to three months notice before the prepayment is made. Be sure to specify that you want the lump sum to be deducted from your loan principal. Without specific instructions, some banks may craftily bank in that amount into your Advanced Payment account instead and you would not have benefitted from the prepayment at all.

Is it wise to prepay your mortgage? Well, it is basically a question of delayed or instant gratification and your personal view on loans. If you believe that the excess money you have now might earn you a better interest than what your mortgage interest rates are, then consider investing it. Otherwise, dumping it into your mortgage will help you be debt-free earlier!

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