After six and a half years, I can happily say that we no longer have a mortgage. It was a massive effort on our part but the result – paying off more than $400,000 – has been amazing. Going through the whole process has convinced me that a huge number of Australians can easily pay off their mortgage in under 10 years too.
Reading the average mortgage article about how to pay off your home loan faster, you’d be forgiven for thinking it’s impossible to save little more than $10 – and that’s by buying a cup of coffee once every second day instead of daily. I’d argue these articles are depressingly dim.
I mean, do you really want to be doing tons of useless things all year long to ‘pay off your mortgage faster’? Or would you rather do what’s right and has the biggest impact – then get on with actually living your life?
I know I don’t like to do useless things when I don’t have to (perhaps because I’m such an efficiency nut) so I’ve sorted some of the most common myths, comments, thoughts and suggestions into three categories to make it easier for everyone: Critical Things, Little Things and Junk.
If you simply want to do the bare bones while making the most impact, just pay attention to the Critical points. If you want to go the whole nine yards then do not only the Critical Things, but the Little Things as well.
As for the Junk… well, you get the picture
The critical things
- Set your repayments higher and make them automatic.
This is THE most critical thing you need to be doing. You can scheme, wrangle and fiddle around with a million things for years but without throwing large percentages of your income at your mortgage consistently… you’ll do virtually nothing to your loan.
The single biggest thing you can do to pay off your mortgage quicker is to find all available extra money and push that to the mortgage. I’m not talking about that once-off $200 bonus or whatever, I’m talking about looking at your income and setting up an automatic, recurring payment to your mortgage that is made up of a sizeable chunk.
From here, your main focus should be on finding more available income by cutting costs, increasing efficiencies and working on generating more or new income.
You likely have a finite supply of money and, if you truly want to achieve the goal of paying off your mortgage faster, the bulk of that money will have to be assigned to the mortgage. I posit most people can strive to get to 70% of their after-tax income onto their mortgage.
- Stay motivated
While it sounds like something you might shrug off, motivation is in fact critical. Even if you’re destroying your mortgage and only need five years to pay it off… that’s still five years you need to keep up your motivation because, without it, there’s sure to be something else to tempt your money away.
Write down why you wish to pay off your mortgage faster and put that reason in a very visible spot so you never forget it. Like on your mirror.
Want to be mortgage-free before you have children? Are you just sick and tired of being in debt? Do you want the security of owning your own home and knowing no one can take it away from you, no matter what happens? Whatever it is, make sure it’s clear and on display so you’re continuously motivated to reach your goal.
- Cut costs and increase efficiency
The more cutting costs you do, the sooner you’ll pay off your mortgage. It’s that simple. It also has the added benefit of often simplifying your life and making you happier. Being more efficient is also far better for the environment: the less ‘stuff’ you realise you need, the better off you and the environment will be.
- Never redraw money off your mortgage
There may be some exceptions to this rule, but it should only be for true emergencies. I’m not talking about a hot water heater failing and costing $1,000 to repair – you should have an emergency fund for those sort of hiccups.
True emergencies I’m talking about are things like half your house burning down, or a family member having to pay for $20,000 worth of hospital expenses. If you’re taking money out of your mortgage for anything else, it not only sends you backwards, but creates a first step which can easily turn into a slippery slope.
Things that do a little:
- Having an offset account
An offset account is like a transaction account. You set it up to receive all your income and the bank then offsets the balance in your account against your loan balance. As a result, interest is only calculated on the remaining loan balance, which can potentially save you a lot of money in the long term. Now there’s no doubt that these allow you to pay less interest on your loan, however make sure you’re still coming out in front after any extra fees they might tack onto it.
- Review and possibly refinance your loan
Keep an eye on your loan’s interest rate and review it at least once a year. Rates change and banks also change their deals, it’s quite likely you could talk with or negotiate a better rate just by asking. While refinancing wouldn’t be something you’d do all the time, it is a good thing to do once you’ve run all the numbers and are confident it’ll save you money
- Don’t pay for features that you are not going to use
Seems like a simple enough premise, however you’d be surprised how many people do it. This one ties in closely with the “Review and possibly refinance your loan” point above. Any features that you’re truly not using should be kicked to the curb during the review/refinance process.
I’d consider a feature unused if it’s costing you money and hasn’t been used to offset that cost in some way, shape or form (for instance: a yearly $395 “package fee” which allows you to have an offset account… but you have $0 in it).
- Park lump sums in your mortgage account
We all know the math, $20,000 parked in your mortgage at an interest rate of 4% will save $20,000 * 0.04 = $800/year in interest. Yes it makes a little difference to your mortgage. However, do you know what’s better than saving $800 a year in interest? Setting your repayments higher and making them automatic so that you don’t end up with large, lump sums of money in the first place.
With the exception of an emergency fund (we used the offset or redraw features as our emergency fund) all spare income should be diverted to the mortgage automatically. This bit of advice is pretty much the same as “have an offset account“.
- Ensure you pay your mortgage weekly or fortnightly
This very common “tip” is just a trickery of math. Where it saves you a bit more off your mortgage is that it forces you to make 26 payments per year instead of the equivalent of 24 due to how the months/weeks work out in our calendar system. Obviously with the extra fortnight of repayments you throw more at your loan while reducing your interest.
Things that do nothing
Make lump repayments or mini lump sum repayments
I believe this is pointless/damaging advice as it encourages once-off high repayments instead of continuous, high and automatic repayments. It is far better, both mathematically and psychologically, to have all your spare income immediately repaying your loan as soon as you are paid.
The money is paid off quicker, lessening your interest burden, and as it’s automatic you adjust to the income left over and don’t feel the “loss” associated with making a “lump sum repayment” once every tax time.
Pay for your establishment fees and government fees upfront
The theory behind this one is that when banks charge you an establishment fee, they add it to your mortgage directly (which they quite often do). This in turn means that you not only pay the fee (for example some lenders have a “Loan approval fee” of as much as $600) but you then also pay interest on that fee.
Now I’ll be the first to admit the maths behind this is sound: a whopping $600 fee at 4%, amounts to $24 extra you’ll be paying every year. These types of tips effectively do nothing in the grand scheme of things.
Align your mortgage repayments with your income
This will do nothing to help you pay off your mortgage faster (unless you’re changing from monthly to fortnightly/weekly payments as mentioned above), however it can help you better view/manage your money and likely save you time.
Increase your repayments while rates are stable
Again this is a dangerous/damaging piece of advice just like our “make lump sum repayments” above. It encourages higher repayments only at certain times – as opposed to making continuous, higher repayments all year round. Ignore finding “special times” or special reasons to make a higher payment and make paying higher the default.
There’s a lot of junk type articles and posts out there, however few of them hit home at just how important the above critical things are. To put it into perspective, parking that $20,000 into your mortgage or offset account might save you $800 in interest per year… however spending your time figuring out a way to double your repayments (paying $1,835 instead of $917/fortnight) and setting that to be your default repayment, will cut 19.3 years off a $300,000 loan @ 4% – and save you around $146,000.
So, when you read these fluff pieces feel free to take their advice and save that $1,200 or $42 per year… just make 100 per cent sure you’re doing every critical thing first!
Sure, figuring out how to double your mortgage repayments is harder than making a single lump sum repayment with that spare $500 you have. But even if it takes you a whole year to double your repayments, that’s effectively like getting paid an extra $146,000 into your bank account. Not bad huh? Is that enough of a pay rise to get you started?