Ok, this is the point when we really need to start thinking.

When you start making repayments, a higher percentage of your repayments should be go towards the principal than interest.

Regardless of how long you want to pay your home loan off for, there’s only one important point you need to know here, and this is it:

At the beginning of your home loan, however long or big your loan is, pay more towards your principal—the amount you borrow—than the interest you pay.

This is the 50% rule.

This is one strategy you can use to stay ahead and pay your home loan off faster.

When you begin making repayments on your home loan, more than 50% of your repayment at the start of your home loan should be going towards your principal and less than 50% of your repayment should be going towards the interest. Btw, you heard it hear first.

For example, when you begin making repayments of $1,200 per week, more than $600 should be going towards your principal, and less than $600 should be going towards your interest per week. Then keep up the repayments.

A quick way to work this out if you already have a home loan is to look at how much is taken out in interest each month. Your monthly repayment would then be slightly more than double that amount. For example, if your interest is $500, your repayment would be more than $1000.

Paying more towards your principal at the start of your home loan is an effective way to get ahead faster whether you pay it off in 5 or 15 years.

Principal-to-Interest Split

Once you have worked out how much you can repay, an ideal Principal-to-Interest split that will help you to repay your home loan off faster is somewhere between 60 and 80% of your repayments going towards the principal, and between 20 and 40% going towards interest.

To work out what your Principal-to-Interest split is, divide the interest you pay in a month by your repayment, then multiply this by 100. This will give you the percentage of the interest part of the split. For example, if your interest for the month was $300 and your repayment was $1,200, 300/1,200 = 0.4, multiply this by 100 gives you 40%. Your interest part of the split would be 40%. To work out your principal part of the split, take 100% and minus the percentage of interest split. In this case 100%-40% = 60%. So your Principal-to-Interest split would be 60%-to-40%. This is worked out for you when you use our calculator (head to payitinfive.com).

If you can, avoid spending more than 40% of your repayments on your interest.

When a greater percentage of your repayments go towards paying interest:

• it becomes very difficult to pay off your debt;
• you could end up paying more than double what you borrowed in the first place (and yes, your home may double too, but that is no excuse to lose sight of where your repayments are going); and
• if interest rates were to rise the chances of foreclosing on your loan would be very high (and you could lose everything).

In particular, avoid—do not even entertain the idea of—a loan in which over 50% of your repayments will go towards interest. If you must, must, MUST have this property, get a second job or second regular income that will help you to reach over 50% of your repayments going towards the principal.

A loan in which 50% or more of your repayments are going towards interest is a high-risk loan (unless of course you are an investor in Australia, then that is a different story). For a house that you live in, aim for between 60 and 80% of your repayments going towards paying your principal off.

If you are a first home buyer, if you would like to pay your home loan off faster, or if you are using your home as a stepping stone to another future property, then a Principal-to-Interest split of 80%-to-20% or 75%-to-25% is ideal (the closer you are to 80% the better).

When you do this, it becomes possible for you to pay your loan out very quickly and allows you to save faster.

Our first home loan was an 80%-to-20% split. Our repayments were $1,200 per week with approximately 80% of our repayments (over $900 per week) going towards our principal, and approximately 20% (over $200 per week) going towards interest. An 80%-to-20% split can help you to pay your home loan off very quickly.

The greater the percentage that you can pay off your principal with every repayment:

• the faster you will pay your home loan off,
• the more money you will save, and
• the less you will pay in interest along the way.

Now, you might be wondering how to work this out. Don’t worry, we have a calculator that gives you this. It is free to use right here (you saw it here first). I will come back to this again shortly.

In the meantime, it’s time to start thinking about how much interest you are willing to pay.