Introduction
Over the weekend, I received an uplifting message from a reader who shared their success story. They and their spouse managed to pay off their home mortgage, thanks to my advice on advancing monthly payments. They mentioned it happened much faster than they anticipated, and now they are debt-free. With no mortgage burden, they can invest to achieve financial freedom.
The Power of Financial Culture and Consistent Actions
This example demonstrates how financial culture, combined with the right mindset to take concrete actions, can lead us further than we initially imagine. In this specific case, it highlights the importance of consistency, discipline, and persistence. This couple made small but consistent additional payments each month and larger advancements when they had extra income from bonuses or holiday pay.
Understanding Credit and Interest
Many people don’t grasp this because they take out loans without understanding how they work. They’re unaware that interest accrues on outstanding balances, meaning early payments primarily cover interest rather than reducing the principal. Most have never seen a loan amortization table.
Loan Amortization Example
Let’s consider a simulated loan from a banking portal: a 1.8 million peso mortgage over 20 years at an annual interest rate of 11.20%, with a monthly payment of 20,850.34 pesos, including insurance and a “deferred credit authorization commission.” This results in an annual cost of 13.5%.
The amortization table clearly shows that in the first month, 16,800 pesos of the payment cover interest, while 2,385.33 pesos go to insurance and commissions. In other words, only 2,025.01 pesos reduce the principal.
After a year, you’ll have paid 250,204.08 pesos in total, but the principal debt only reduces by 23,344.27 pesos. The rest are interest and other charges.
Accelerated Payments
If you could pay an extra 2,500 pesos per month (totaling 23,350.34) instead of the standard 20,850.34 pesos during the first year, you’d effectively advance 14 months and save over 250,000 pesos in credit costs.
As the debt (principal or outstanding balance) decreases, interest generation slows down. The cost of life insurance also reduces since the home’s value remains constant.
This means making additional payments in the early years of a loan is far more impactful than later, though they still have significant positive effects.
Total Cost of a Mortgage
People often underestimate the total cost of a home mortgage. In this example, with an 1.8 million peso loan:
- Without any advance payments, the total comes to 4,925,425.01 pesos – 2.74 times the original loan amount.
- With monthly extra payments of 2,500 pesos, the total becomes 3,407,904.03 pesos – saving over 1.5 million pesos and reducing the loan term from 20 to less than 14 years.
Making additional payments with extra income from bonuses or holiday pay can lead to even greater savings in both time and money.
Key Takeaways
- Understand your loan: Familiarize yourself with the loan product and its amortization table to make informed decisions.
- Consistent payments: Small, regular additional payments can significantly reduce the loan term and interest paid.
- Extra income allocation: Direct extra income, like bonuses or holiday pay, towards your loan to accelerate debt reduction.
My personal experience with a mortgage mirrors this advice. By creating an amortization table in a spreadsheet and allocating bonuses and holiday pay to my mortgage, I paid it off completely in less than five years, originally planned for 15.
