Everyday Money

When you analyse a mortgage, there are three components which determine the true cost to you: the principal, the rate of the interest you pay and the total amount of interest paid. The principal is the initial amount you borrow, an amount obviously decided by the borrower in conjunction with the lender.

For a $230,000 mortgage, assuming an average interest rate of 7.5 per cent (based on the average interest rates of the past 10 years), the borrower will pay $348,950 over a 30-year term and $279,940 over a 25 year term.

Combine this with the principal amount and you have your total repayments: $509,940 for 25 years, or $578,950 for 30 years.

At the end of the day, you cannot influence the interest rate. At best you might be able to negotiate a discount. But a discount does not have a major impact, if you could secure a lifetime discount of 0.2 per cent (so average 7.3 per cent instead of 7.5 per cent), you will save $11,297 in interest.

What you can influence is the total amount of interest you are paying. Channelling your income through your loan to offset the interest cost, reducing your term, and making extra repayments will all have a substantial impact on the total interest you will pay.

Simply channelling your income can save 12 years' interest worth $147,194 on $230,000 borrowed on a 30-year term at 7.5 per cent interest. This translates to a real interest rate discount of 2.75 per cent, giving an effective real rate of 4.75 per cent.