How (NOT!) To Pay Off Your Home Loan Super Fast
A week ago the following article was run in The Age with the hot racy title of “How To Pay Off Your Home Loan Super Fast“. When I was forwarded this from my DW, my first reaction was “Fantastic! Maybe the mainstream media is finally getting in on helping people Mutilate their Mortgages!”… but alas, instead I was hit with the repeated drivel that so called “professional journalists” spew out time and time again. This is the kind of crap that motivated me to start up Mutilate The Mortgage in the first place as I know firsthand that getting good, accurate information on the best ways to kill that mortgage is almost non-existent throughout the web currently, especially for Australians who now have some very high mortgage to annual income ratio’s.
So lets take a quick look at some of their “tips” and see how they’d really do when you actually look deeply at them…
One of his tactics is to always save any gold or silver coins he receives in loose change… every year [he’d] take that to the bank and cash the coins in and it would come to about $4000
Firstly… $4,000!?? REALLY?? Who the hell racks up $4,000 worth of loose chance over the course of a year? As one commenter pointed out, $4,000 a year is $76.92 per week in change! Given that this is pretty unlikely for most people I think we can bust this “tip” right away. Now, I’m no fan of shrapnel and I must admit that I do also chuck all my spare change into a box after each day and then cash it into the bank once in a while. But this tactic isn’t something I do to pay off my mortgage super fast, it’s something I do because I hate carrying around crap loads of metal in my pants day after day.
Now I’ve never been one to just say “haha he’s wrong” and expect people to believe me, so let’s hit up some quick figures for a more scientific humiliation. Assuming a more moderate amount of change generation (say $1 per day, which I think is probably still quite high) we can see just how much difference it really makes. A $300,000 mortgage @ 8% being paid off over 30 years will require a $1,011.65 fortnightly payment (according to the NAB calculator). If we now add our $1 a day change money to that fortnightly payment we get $1025.65 ($1,011.65 + $14). This cuts our loan term down by 1.6 years. Long story short, yes, adding change will decrease your mortgage loan term, but even with a moderate amount of change generation, it won’t get you paying off your home loan “super fast” I’m afraid.
The other annual top-up to the mortgage comes from his tax return…
This tip is one that crops up over and over throughout many “How To Pay Down Your Mortgage Quicker” top 10 lists. You get your tax return once a year and assuming it’s a few hundred bucks (or maybe a few thousand if you’re lucky), you put it straight into your mortgage as an extra lump sum payment. You feel all warm and tingly inside that you’ve “done really well” and go back to your normal life. Now don’t get me wrong, this does help pay down your mortgage faster than doing nothing every year, but even with a (I’d say) massive tax return of say $3,000 every year, it won’t get you paying off your mortgage super fast. Again, running some quick numbers we see the same $300,000 mortgage @ 8% being paid off over 30 years that requires a $1,011.65 fortnightly payment. If we add $3,000 each year as an extra repayment it does cut about 9-10 years off the loan, but again we’re still stuck with a mortgage for 21 years… hardly “super fast”.
Instead of doing random, once off “hits” like this tax return idea, I like to push you to make regular, specific repayments to your mortgage and aim to push up to 70% of your after tax pay towards your loan. This is more extreme obviously, but it gets results which is what this site is about. In that linked article, I demonstrate that if two “average income” earners push 70% of their after tax wages towards a mortgage of $400,000 @ 7% (note that is $100,000 more than the example mortgages I’ve been giving above) that they’ll be able to kill it in 6.5 years. The entire loan, paid off in only 6.5 years. THAT is “super fast” in my books!
…his most successful strategy has been to make weekly, rather than monthly, repayments on his mortgage.
I believe I covered this point in the previous article And He Hacked Said Mortgage To Pieces With Thine Spreadsheet. This is a very big “myth” in the finance/mortgage world as technically paying weekly versus monthly payments on a loan WILL save you some money (in that article I calculate it to save you $981 over the entire 30 year loan of $250,000 @ 7.5%). However, once again, this won’t be making you pay off your mortgage “super fast” I’m afraid.
Kerr stays motivated by watching the forecast term on his home loan, which he’s reduced from 30 years to 19 years since buying his home four years ago, and he hopes to have the house paid off in full in the next five years
This tip was actually one I agree with and can be a major factor in truly paying off your mortgage super fast! Unfortunately the article doesn’t go into any more detail about this very crucial point. As I’ve pointed out many times though, motivation is one of the key things that you need to have in order to truly mutilate your mortgage. Without proper motivation, even the best laid plans will be ignored and forgotten once you become bored or if something else more exciting comes along. The main source of this motivation is tracking and monitoring that loan end date (typically with The Spreadsheet) and trying to get it closer and closer with each change you make. This Kerr fellow also seems like he’s done some good work so far if he can indeed pay off their mortgage in 9 years although with some of the methods found here at Mutilate The Mortgage, there’s a good chance they could pay it off even faster.
Try these mortgage repayment calculators apps…
Finally we have the grand daddy of “tips”. Something that made me quite literally laugh out loud whilst reading it. How can you “pay off your mortgage super fast” you ask? Why, just go and pay $2 for a mortgage repayment calculator app of course! You can get them for free at every one of the major banks websites… but sure, you will definitely be able to pay off that loan quicker by wasting your money! </sarcasm>
P.S. If you are one of the people who bought one of those apps, please leave all your credit card numbers, your name and CCV in the comments section as well :-P