How Much Should I Pay On My Mortgage?
It’s an often asked question isn’t it? How much more SHOULD you pay on your mortgage hrmmm?
Want to know a dirty secret? Virtually everyone with a mortgage has no idea.
Maybe the correct answer is $42. Maybe it’s 30% (hint: it’s NOT!). Either way you can jet ski right past virtually everyone with the information below.
Maybe that headline should read “How Much EXTRA Should I Pay On My Mortgage?” as the bank will likely determine how much you’ll be required to pay. For the purpose of this article I’m assuming you are paying the minimum (maybe more) and are seeking to find out how much extra you should be paying on top of that minimum just to be clear.
Now, I’ve already put my foot down and proclaimed that 70% Of Your Wage Should Go To Your Mortgage. This is what has helped us mutilate our mortgage and we are scheduled to pay it off in a total of just 6 years. However I want to address this issue once more because it is so, SO important and I want to make sure that new readers that have come along are fully aware of it too. I also thought I’d try and simplify the logic behind the different levels of paying off you mortgage and what they’ll mean for you, your life and your financial situation. To start with though we have to have an example case as it will make everything clearer on how all this relates.
Example Loan Size: $300,000.
Example Interest Rate: 6%
According to the ABS the average loan size for FHB’s and Non-FHB’s as of 2009-2010 was $281,000 and $278,000 respectively. As this is now 2-3 years out of date though I’ve jacked up the numbers a bit (I also like round numbers ). Some will think it’s too high, others too low, it doesn’t REALLY matter though as I will further explain below. I’ve also assumed the interest rate is 6% as this seems like a pretty reasonable rate currently.
The only other thing we need now is the different mortgage repayment percentages. This is just how much you’re putting towards your mortgage, divided by your entire household after tax income amount.
So imagine Jack and Jill have gone up the hill and managed to secure themselves an average Australian wage each of around $70,000 a year. That’s a total household income of $70,000 + $70,000 = $140,000.
After taxes come into play they see roughly $110,900 actually IN their bank accounts each year. This is their total household after tax income.
To get the mortgage repayment percentage we just divide the amount they pay per year towards their mortgage by this after tax income amount ($110,900). If they were to pay $30,000 towards their mortgage each year say, then we get:
Easy enough? If they paid $0 towards their mortgage their percentage rate is 0%, if they paid $55,450 per year to their mortgage their percentage rate is 50%. The more you pay, the higher that percentage goes.
Now that we’ve defined what these things are we can see how the length of a $300,000 mortgage changes when you change your repayment percentage rates. I’ve arrived at these numbers by using our trusty NAB Repayments Calculation tool.
|Repayment Percentage:||Loan Term:||Total Interest Paid:|
I’ve also put this in graphical form as it’s easier to see the trend this way:
As you can see, both the loan term and the total amount of interest you pay over the life of the loan steeply decrease as your repayment rate increases. This isn’t too huge a surprise to most people I don’t think but regardless of how much you earn or how much your mortgage is, these graphs are going to turn out pretty similar looking. An incredibly steep decline at the beginning, followed by a tailing off at the end where an increase in your repayment rate doesn’t really get you that much shorter a loan term or save you that much more interest.
Now after doing this analysis and seeing the facts I’d posit that after around the 70% mark things tail off quite a lot. If you were to make 70% repayments vs. 95% repayments, you’d save 1.33 years and $14,692 in interest. Considering the lengths you’d have to go to in order to push your savings rate from 70% to 95%… I don’t believe it’s really worth it. At some point you have to acknowledge that you don’t want to sacrifice how you live your life now just so you can save X years off your loan. However there is a balancing point where the sacrifice IS worth it and I’m confident that point is around the 70% mark.
At 70% you can live on the trailing edge of luxury and still mutilate that mortgage. Here you can pay off that mortgage in 4.5 years, an incredible feat whilst still eating very healthily, doing sports and social activities and even driving a moderate car if you have to. If you can go higher still to 75% or even 80% you’ll be free of that mortgage in 4.15 or 3.85 years respectively.
Why is hitting this 70% repayment rate so important?
Are you unsure if what you’re doing with your mortgage is “right”? Do you hate that you’re so locked into your job because if you quit you couldn’t make the repayments? Do you just want it to be paid and done already? Or do you just want to be ahead of the curve?
If you’re wondering how much extra you should pay on your mortgage you likely know what you’re currently paying and what others around you have suggested (likely 30% I’d bet). You’re here wanting guidance on what is best for you and likely your partner. Maybe you’re just curious. Maybe you’re out to find a true challenging amount that you can set and work towards. Something you can feel proud about. You might have a certain goal in mind like paying off half the house before you begin a family. You might have chosen an arbitrary number that you want to pay off your house in, say “under 10 years”.
If any of this is sounding familiar to you then I’d advise aiming for 70%. It takes work. It takes proper motivation and mindfulness and ongoing effort. Many will claim it’s impossible. It’s not. Shut those complainypants out.
What it does is set you up fantastically for the future. It enables you to know you’re not paying your house off twice over because of all that extra interest. You’re beating the banks at their game. You’re securing your future and instilling lifelong saving habits that will set you on the path to financial freedom long after you own your house. You’re also totally “levelling up” in the awesome game of personal finance .
Did you buy your first house at say 26? Is your mortgage amount similar to the example above? You could have it paid off by the time you’re 30 and likely wanting to start a family. How does that possibility sound to you? If your mortgage is higher (or you bought later on in life) you could have it on the ropes by that same time. If it sounds good then aim for that 70%.
Most dream and secretly wish for this scenario to just “happen” to them yet few plan, few scheme and fewer pull it off. Well here you are and here I am telling you it CAN be done, it HAS been done and you CAN do it. I’m also showing you FOR FREE exactly the steps you need to take to get this dream. Few people teach dreams for free. They’re not lame “Top 5 Best Things” lists… they are detailed, Australian specific and up to date plans that you can just pick up and run with, even if you don’t have much specific financial knowledge. Next week we’ll be delving into those who have a dual income and one child and what they could be doing to Mutilate The Mortgage.
So now you know the strategy is simple. You know the logic behind it is simple. All you have to do is accept the challenge and follow through on it. Subscribe to Mutilate The Mortgage (RSS or Email), pick up your Mortgage Planning Spreadsheet and get to work hitting that 70% target!
The benefits include: 1) How to pay off your mortgage faster than 99% of people with one hour a month of work 2) How to get rid of your debt and have the freedom to spend money on the things you love, guilt free 3) Clear outline of how to setup your expenses, mortgage and general finance 4) How offset accounts work and how to get the same result without being gouged by the big banks 5) How to cut through the crap and focus on the things that truly matter when taking down a mortgage 6) How to adjust the strategy so it works for you, even if you have kids, even if you only have one income 7) How to do all of these things and maintain a normal social life (and never be cheap).