How will you repay the principle one day?

Taking a loan may be an easy and fast process. However, if you fail to plan how you will repay it, you are going to have a hard time. Financial planning and management goes a long way in ensuring that you have a good financial position and that you are able to clear debts in the shortest time possible.

An endowment mortgage is defined as a loan arrangement in which the borrower pays interest only to the lender while the installments of the principal are paid into a life insurance policy. The maturity date of the policy is similar to that of the mortgage. These plans are usually run for a period of 10 to 25 years.

An example of this is when a borrower has an interest only mortgage valued at $200,000 for 15 years, they are expected to pay the interest on the amount borrowed each month. The full amount of the principle, which is $200,000, is expected to be paid at the end of the term of the mortgage.

  • Paying off the loan as soon as it matures

Repay the principle as soon as it matures

Repay the principle as soon as it matures

The main aim is repaying the principle. And it is not simply paying it off, but doing so within the soonest and the shortest period of time possible. Therefore, a lot of sacrifice and discipline will be required so as to meet this goal. Note that the value of the principle will decrease over a period of time. This is due to inflation.

As a borrower, you should make arrangements on how you will save up the money so as to pay off the loan when it matures. The lender plays no role in making loan repayment programs. You may pay off the principal in the following ways:

  • Frequent savings

You may have a standing order placed on your account so as to instill a sense of saving discipline. You may direct your banker to send money frequently from your checking account to a savings account. The amount of money that you pay towards your loan may be increased. This is possible if you have some disposable income after settling your monthly expenses.

  • Extra cash flow

If you happen to receive an annual bonus or an income tax refund, this extra source of income can be used to cover the loan repayment.

  • Investing in income generating business

Proper use of your money involves investing it in high return ventures. These profits will give you an extra source of income and such cash flow will enable you to have more ability to pay off the principle.

  • Inheritance and gifts

Inheritance & gifts

Inheritance & gifts

If you are lucky enough to receive gifts or inheritance, you will be able to use this to pay off the principal.

Proper planning ensures that you will be able to pay off your loan when it matures. With this, you will avoid less attractive options such as extending the mortgage term, remortgaging or downsizing.

As the loan repayment is an expense that you are aware of, good planning ensures that you will not be overwhelmed when the payment is due. As windfall payments such as inheritances or bonuses are not a sure thing, your efforts during the mortgage will go a long way in securing your finances, and even your home and other assets, when the mortgage is due.