June 01, 2019 Mortgage tips to pay off your home faster
Before you buy your first home, the thought of taking on a sizeable mortgage can be pretty daunting. I totally get it. I felt the same prior to taking the plunge and buying my first property back in 2007.
There’s something about the psychology of borrowing such a large amount of money and paying it off over such a long period of time if, like most, you’re just sticking to the minimum repayments. In saying that, getting the right mortgage tips can make a massive difference.
Twenty to 30 years is a long period of time, which, I think, is where half the anxiety comes from. Dragging out that amount of debt over so many years just means you’re going to end up unnecessarily paying an insane amount of interest in the process, which, for me, is just crazy.
Here’s the biggest mortgage tip of all – you don’t have to wait that long to pay off your mortgage. In fact, you could pay your home loan off in six to seven years and become completely mortgage free if you really put your mind to it. Sure, it comes down to will power, but, often, that’s not enough. You need a sound strategy and structure to really bowl your mortgage over sooner. Will power then just becomes the fuel to make it happen and help you stick to your game plan.
As a financial adviser, my job is to ultimately help you reduce the amount of interest you’ll pay over the life of your loan. I’ll explain why…
Meet Sally and Dave (not their real names). They were recently referred by another member of ours and wanted to see if they could get a better deal on their home loan.
They have two kids and bought their dream family home in Ashwood five years ago. They borrowed $530K through Commbank, and their interest rate is currently 4.54%, which, given today’s rates, is pretty damn high.
Let’s see what that looks like over 30 years…
Total loan repayments: $1,041,262
Total interest charges: $511,262
I know, right?! Over that time, they’re effectively paying just over $1 million, around half of which is interest.
My mortgage tips? I gave them two options. The first being really straightforward and relatively easy to implement. The second, requiring a real commitment on their part.
Mortgage Tip #1: Get a better deal on your mortgage
Interest amount saved: $130K
Years shaved off mortgage: 4
We managed to negotiate 3.88% for Sally and Dave, which is huge, considering they’d been paying 4.54%. Sounds rather simplistic, but most families don’t realise how even the most marginal of reduction in interest rates can save you a small fortune.
The other part of this particular strategy was for Sally and Dave to keep their current mortgage repayments of $2,699 a month the same without impacting on their current lifestyle.
You could argue this strategy’s the path of least resistance. It’s simply getting smarter and snaring a better deal, without having to change your current spending habits.
Mortgage Tip #2: Get smarter, pay down your mortgage faster
Interest amount saved: An additional $130K
Years shaved off mortgage: 10
This strategy, on the other hand, requires real commitment. What I mean is, really knuckling down, spending less, saving more and throwing these additional savings onto your mortgage.
We sat down with Sally and Dave and deep dived into all their expenses and rationalised each and every one of them and helped them set a spending/savings target.
Sally had just returned to work, so their family income’s increased as a result. We set them up with our tried-and-tested money management system (outside of our members using it, Michael and I use it ourselves), and structured it so that Sally’s income goes straight onto their mortgage as soon as it’s paid into her account.
What this strategy all boils down to its structure. As I mentioned earlier, will power and discipline is important, but having the right strategy is absolutely vital.
As always, I’m around for a quick chat if you want to dive a little deeper about anything. In the meantime, if you are looking to understand investing, you can grab a copy of our investment philosophy here and we also have a neat education program on buying your first investment property, which you can get here.
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