The Official Mutilate The Mortgage Strategy
No one like BS.
No one likes endless beating around the bush and talking and talking and talking. You want to pay off your mortgage quickly and you want to do it without it taking up too much of your time I hear you. You want to know that what you’re doing works and has been tested and proven to work before. Well you’ve come to the right place.
Welcome to The Official Mutilate The Mortgage Strategy.
Why You Need A Strategy
I know I said no one likes endless talking so feel free to skip straight to the diagram below, however I would like to cover some introductory points first. Now it may seem a bit of over kill to have an entire strategy just for your mortgage but hopefully I’ve convinced you by now that your mortgage is no small deal. You can stick your head in the sand ostrich style and pretend like it’s not a big deal but that still won’t change the fact. Your mortgage is THE biggest debt you will likely ever own and as such it carries along with it THE biggest punishment (interest) you will likely ever get. Logically it should be in everyone’s interest to minimize this however most just live life in blissful ignorance.
When you put things in your life in context, your mortgage is a giant elephant constantly in your life’s way. An official strategy will help you not only move forward, but move forward in the RIGHT direction. In an upcoming post I will be outlining a large number of “tips” or recommendations that numerous other sources often sprout when dealing with “paying off your mortgage fast” along with if you should really be paying attention to them or not. My hopes is that this article (along with that upcoming one) will not only give you a solid, workable strategy for moving forward, but that it will also stop you from wasting your precious time on useless things (all those red arrows up there). If I had this post when we started our mortgage we could have finished it in 5 years instead of 6. Who knows how much interest that would have also saved us.
There are two reasons there aren’t many steps to this strategy. The main one is that when everything is considered and boiled right down to the major components, there aren’t that many things that truly make a large difference when it comes to paying down your home loan. I’m talking the kind of differences being like $50,000+ in saved interest. The other reason is that I like to keep things simple. Now just in case you’re not aware, this isn’t a PLAN, this is a STRATEGY. They are two different things even though most people use the terms in place of one another regularly.
The Difference Between A Plan And A Strategy
A plan is usually a list of steps taken to accomplish a goal. A plan is very concrete in nature and doesn’t allow for deviation. If “Plan A” doesn’t work, you don’t alter “Plan A” and try again. Rather, you move to “Plan B;” something totally different. It is usually made up of step by step instructions such as do task A, then do task B and so on.
A strategy is bigger than a plan. A strategy is very flexible and open for adaptation and change when needed. A strategy is a layout, design, or idea used to accomplish a specific goal. It often has multiple paths to the same goal allowing for things to go wrong, but for the goal to still be accomplished.
A large number of people that regularly succeed in life do so because they use strategy, not just planning and that’s what I’m introducing today.
It’s my hope that by laying down a relatively broad strategy that the vast majority of readers (you!) will easily be able to adjust and mould it into something that works for you. Whilst I like to give you actionable steps such as what to say to get out of paying bank fee’s as it help people new to the information spring board right into getting the best results, I could never give specific step-by-step instructions (aka a plan) to cover every scenario. I will no doubt post more in depth articles later on referencing each of the various parts of the strategy but for now I’m taking a high level view to get the bulk of things outlined.
Just Show Me The Damn Strategy!!!
Alright! Alright! Sheesh… impatient lot aren’t you… here it is…
Simple huh? Deceptively.
The Official MTM Strategy Explained
Sounds like a bit of a strange first step doesn’t it? Well it turns out that this is THE most relevant and serious section to mutilating your mortgage, even more serious than actually paying your repayments!
You see, your brain has great power. One of the biggest powers is that it shapes reality for you. What you see in the world, and what happens around you is largely irrelevant compared to how you interpret it. This has been proven time and time again in numerous psychological studies around the globe. It’s also pretty normal when you think about it, you and I will have different opinions of the same thing, different ways of seeing people, events and so on due to how we’ve each been brought up. We perceive the same world around us differently.
You do not see the world. You see your own personal reality based on your prior experiences.
Stop and have a bit of a think about that statement. It’s quite obvious and straightforward, but has profound results when you dig deeper. For example, a serious gambler may in reality destroy their entire life as well as their families lives, however in their own mind there isn’t anything actually wrong! They often honestly and truly believe that they are fully in control and handling the situation fine. They believe that their habit is nothing to worry about or that it’s actually quite normal.
That’s how powerful shaping your own reality can be!
Your mind defines your reality and your reality shapes your views, your wants, your needs and your goals. If you don’t think there’s anything wrong with paying off a mortgage over 30 years then you’ll never mutilate your mortgage. You will never investigate it, never do research on it or try to pay it down quicker, you’ll just drift along in ignorance thinking “that’s what everyone does“. This section is about setting up YOUR reality because without doing this, you’re likely doomed to fail.
So to start with let’s get your thoughts and mind on the right track. You’ll want to be VERY aware of what’s commonly called Mental Barriers. These are mental walls that you throw up without even noticing it and that stop you immediately from even trying this whole strategy. They aren’t physical things, they are reasons you will come up with that will essentially “let you off the hook”. When I say something like 70% Of Your Wage Should Go To Your Mortgage your mind might automatically come up with a reason like….
This couldn’t work for us because WE have kids…
That “average salary” wage is way above what I make so this whole thing is crap.
I like to actually have fun and enjoy my life, not scrimp and save just so I can pay off the house a few years early.
And so on…
These are Mental Barriers.
This is your brain and your preconceptions shaping your reality and dictating to you what you will do. Does it matter that the maths proves that you can mutilate your mortgage even with kids? Of course not because you’ve already made up your mind and decided that it can’t be done.
You need to setup your reality.
Now I’m not saying these barriers aren’t real. To you, they ARE very, very real and something like “wanting to actually have fun” could be rooted from seeing your parents scrimp and save their wholes lives and being miserable because of it. It might seriously scare you to think of having to save your money as you don’t want to go back and experience what that was like. These barriers ARE real. The thing is though that as intelligent and logical people we should not let our fears, our bias’ and our preconceptions get in the way of us having a more financially stable and enjoyable life.
You may believe that you can’t put 70% of your after tax wage towards your mortgage without living like a poor person and suffering immensely, but the fact is that countless people do it willingly and actually PREFER it over spending money. If you gave Mr Money Mustache or Jacob from ERE $10,000,000 they wouldn’t change their lives one bit! They’d continue living exactly the same way they’ve been living for years which is off very little money.
So this is why the first stage of The Official MTM Strategy is to setup your reality. We want to set it up not to MY preferences or to anyone else’s preferences… but to YOUR specific preferences. We are going to change your own reality and thinking so that it is in alignment with your specific financial goals. This is vastly different to “tips” and “2 minute advice” that most financial planners or friends give. It will profoundly change how you view money and thus, how you ultimately save and spend it. As such, the first part of this section is to figure out your specific financial goal.
So what are your goals in life?
It’s OK not to have thought about this before too, many people don’t. The point is you will likely have “things” you’d like to achieve. Important things like maybe “starting a family in 5 years” or “being free of ALL debt (house included) in 10 years”. Whatever it may be this serious goal should obviously be related to paying off your mortgage fast (this is Mutilate The Mortgage after all). Through calculations and use cases I posit that even average salary people can become, with proper discipline and following this strategy, free of their mortgage debt within a far shorter time frame than the “normal” 30 year period. Below are some suggested time frames for your goal depending on your income and assuming a roughly $300,000 loan amount:
|Single Income Of:||Loan Term:|
|< $70,000||15+ Years|
|= $70,000||11-13 Years|
|> $95,000||6-7 Years|
|Couples Income Of:||Loan Term:|
|< $140,000||7+ Years|
|= $140,000||5-6 Years|
|> $180,000||3-4 Years|
If you have a larger loan then obviously these numbers will increase by a year or two. If you DON’T have a mortgage yet then you still need to setup your reality by fully reading and adjusting your thinking to follow this post.
Once you have your goal (say, to have the house paid off in 6 years) then you need to start learning how to break down any Mental Barriers that get in the way. The best way to do this I’ve found is to acknowledge the barrier (a good tip is to simply write it down), try what you believe to be impossible anyway (give it at least a month or three), and THEN make an informed decision after you have done some tests and have actual facts.
For example, if you have the mental barrier that “in order to pay off your mortgage quicker you have to live a poor and boring life” then first admit that this is a mental view point you have, acknowledge that you may or may not be correct about it and then TEST it! Go for one or two months committing 70% of your wage (or as much as you can) to the mortgage and see what happens. The worst case is that after two months you’ve paid off more of your mortgage and you’ve learnt whether or not that barrier is real. Chances are though that you’ll likely find a more Spartan existence uplifting and relaxing.
Try and question your reality, your “automatic” believes to make SURE that they’re real and not just something that’s been absorbed over the course of your life. Think about what you or your parents particularly ALWAYS do or ALWAYS have thought/believed… then test them. You might think that having children HAS to make you poor. You might believe that in order to create a budget you NEED professional financial advice. You might just assume that because you’re different than most people that this strategy won’t work for you. You could believe that having a food bill below $100 a week is impossible or that never watching TV would be the worst thing in the world. Well the fact is you might be right, but at least test it first before you think that it’s 100% true and correct.
Have a VERY specific goal and ALWAYS question your assumptions.
This section can involve a lot of messing around with banks and working out the best rates and so on. I often suggest that you’re far better off going for a simple, no frills style mortgage plan. No offset accounts or fancy credit cards, just a super low interest rate, no fee’s for the life of the loan and you’re set. Other’s swear by very expensive ($3xx+ fee’s per year) wealth packages or other ones that give you special credit cards and rewards points and so on. As a general rule though, when companies that are wanting to make money off you are involved, I often find the more complex something is, the more likely it is that you’re going to end up second best.
That being said though some wealth packages DO suit certain families or lifestyles very well and I’d never be so arrogant as to suggest that one size fits all. This is a strategy after all and it must be adaptable for everyone. You might try the wealth package, find that it’s a failing path and readjust to the no frills loan instead, both end up at the same goal. Given your goal of wanting to pay off the loan as quickly as possible there are a few things you should look out for and prioritize though when either choosing a loan for the first time or refinancing.
Generally the two most important factors for setting up a mortgage are to be ruthless on the interest rate you’re getting and to make sure the loan allows unlimited extra repayments. Achieve these two things and it will fit in very well with your mutilation strategy.
Any loan that doesn’t allow you to make unlimited extra repayments should be ignored as well as most standard variable rates. These “standard” rates are often 0.7% to 1% ABOVE what you can easily get, even at the big four banks with proper research and negotiation. You should learn how to negotiate, come armed with facts and figures from your research and try and get that interest rate as low as possible. Don’t let them waffle on about how it’s “only a few fractions of a percent“, this is money, YOUR money and even fractions can translate into hundreds or thousands of dollars over a few years.
Be open to going to other institutions like credit unions or smaller more unknown banks to get the best rates. Although they will likely demand a higher LVR, they can offer big savings over the major players more often than not. Use comparison websites to seek out lenders that you might not otherwise have known about but be sure to read all their terms and conditions.
Whilst many will drone on about how the interest rate isn’t the ONLY thing that’s important in a loan (likely the salesman), it is by far the most critical part. On a $300,000 loan a rate of 6% vs. 5% equates to you being charged interest of $1,500/month or $1,250/month… EVERY month. Take your time (and I can’t stress this enough) learn to negotiate! You can spend a vast amount of time researching, comparing, reading PDS’s, talking to mortgage brokers, building spreadsheets to compare different options and on and on but you have to weigh up your effort vs. results. Spending two weeks researching how different loans work, talking to a mortgage broker to find out what their opinion is given your specific goals and financial situation and learning how to negotiate a better rate will give you a monumental lead over 95% of the rest of people out there. On the other hand spending two weeks trying to figure out the ins and outs of all the different wealth packages and which credit card will suit you best probably isn’t as good a use of your time. Sure, it would save you money, but the other research will save you far more.
Prioritize your time and what you investigate making sure to practice your negotiation skills.
At the end of the day though you want to minimize your fee’s (these should be $0) and minimize your interest rate (aim for a full 1%+ below the big four SVR’s) without the use of a wealth package preferably, or at least one that has no $300 fee! Achieve these two things and everything else is just icing on the cake. If you’re truly unfamiliar with how it all works I’d highly recommend a mortgage broker. Don’t let them tell you what to do, you should always be in control, simply use them as a fountain of knowledge to help you build up your final decision. When you approach one always make sure you know exactly how much you’re going to borrow already and have a few bits of research done already on who YOU think is best suited to give you a loan. When all’s said and done, you should have a loan that you can easily and aggressively pay down without any penalties, have a very low interest rate to minimize your interest charges and zero monthly or yearly fee’s.
This streamlined mortgage can be further investigated and fine-tuned at a later date once you’re more comfortable with everything but to start out with this will set you up fine.
There’s many views in this area. Some people think budgets are sexy, others like them and spend hours fine tuning them in Google Spreadsheets, others are happy to do them or adhere to budgets but don’t do so very frequently and others still vehemently hate and detest them. I’m personally a big fan of at the very least being aware of exactly what you spend as the human brain really isn’t good at simultaneously tracking a large number of varying figures over long periods of time. You don’t have to love budgeting or even be that strict with yourself about it all, but keeping a semi to full detailed list of your yearly expenses and financial position will help organise you and prepare you for your future. It will also enable you to put as much money towards your mortgage repayments as possible, whilst still maintaining a stable amount of money in your personal account for everyday items.
Although it can get quite complex and different for each person, at the end of it all, it boils down to this simple equation.
Mortgage Repayments = After Tax Income – All Expenses
So obviously to GET that mortgage repayment number to pop out, you’re going to need to know your after tax income (pretty easy for most to find) and how much all your expenses are costing you (slightly harder for most to find out). Now I’ve already done an extremely detailed post on the way I do this and the very easy way you too can do this and that’s using The Mortgage Planning Spreadsheet.
Once you’ve setup this spreadsheet and entered in all your expenses, you will be provided with an amount you can put towards your mortgage whilst still meeting all your expenses. It essentially does that “simple” equation mentioned above for you once you give it all your information.
The final step in this part is to actually CHANGE your mortgage repayments to this given amount. This is done by contacting your bank (or possibly online) and I’d advise doing it straight away. Many people when faced with the number the Mortgage Planning Spreadsheet spits out don’t believe that it’s possible. One of the biggest mistakes we’ve made throughout paying off our mortgage is starting out too timidly. We, over many months, slowly ramped up the repayments amount getting more and more. Whilst this wasn’t a huge problem per say, it did mean that for almost a full year we were paying far less than what we could have been putting towards the loan.
If you have a free redraw account or are adding the extra repayments to an offset account there’s no downside to going all in. If you DO put too much into the loan and find that just before your next pay day you’re running up short on cash, you can adjust the spreadsheet a bit for the next pay cycle and either just “do without” for that short time frame or use the money in the offset account. No harm has been done and you get to jump straight to FULLY mutilating your mortgage straight away, no months of building up. Also make sure that these repayments are automated, that way you’ll be beating this long term problem with no sweat.
One final note is that you will likely notice a fairly decent Mental Barrier get thrown up when the Spreadsheet tells you what amount your repayments should be. You will likely feel uncomfortable.
Can we REALLY afford that much?
If you don’t believe me, then test it! Try it out for 2-3 months as there’s no downside provided you can always get back at your redraw/offset money. Don’t let your reality be dictated by your past experiences. Take control and push forward into mutilation terrain!
Finally comes the ongoing section of this strategy, pushing past the 70% mark.
It’s quite likely that when you do the above calculation in section 3 you won’t be rocking a 70%+ ratio, we certainly weren’t at first. The general rule of thumb is that if you’re contributing anything more than 30% towards your mortgage then you’re under “mortgage stress” and should be given a nice shoulder massage to make you a little more relaxed (DW loves those and if you’re reading this, tell me and I’ll give you a 5 minute one). So don’t be at all depressed or sad if you’re number isn’t 70%, everyone has to start somewhere and as one commenter said recently:
better late than never – right??
Section 4 focus’ on taking that number and doing everything you can to push it past 70% as time goes on. You could refinance your loan to make it cheaper, you could unplug that unused fridge in the garage that sucks up power like no tomorrow, you could walk to the groceries store from now on, stop wasting money on Foxtel, learn how to cook instead of eating out all the time and a million other things. I’ve suggested a fair amount on here already and it’s no hard task finding frugal blogs and tips out there.
Your time and money is precious, don’t waste them on buying useless crap that also wastes precious natural resources. Spend it on something that will instead decrease your mortgage and see you out of debt sooner. How sooner? Well that’s the other fantastic thing about The Mortgage Planning Spreadsheet, it tells you the exact date you will be mortgage free! I personally find this an EXTREMELY good motivator and it also helps put spending costs in perspective. You can make comparisons like “Is having TWO cars instead of just one really worth having to pay the mortgage off for 6 years instead of 4?” or “Wow! If we can manage to only spend $100/week on food instead of our current $200/week, it’ll shave 5 MONTHS off our home loan!”. It helps to motivate you and keep you on track as the months and years go by. Paying off a loan (no matter how quick) always takes years and so making sure that you are properly motivated is essential.
You might not make it all the way to 70%. Generally the lower the income (especially if you’re single) the harder it will be to get to it, however that doesn’t mean you should give up or not be happy with your efforts. Although I champion that 70% figure, it is by no means the be and end all. Just make sure that if you’re NOT getting to it, that those Mental Barriers aren’t the things holding you back. Are you unable to reach 70% because you have always just assumed having Foxtel is a must? Or because you’ve tested it and come to the conclusion that the $70/month or so it’s costing really is worth it?
When you push towards 70% and then past it always look not for the obvious things (how can I decrease my power bill? how can I decrease our car insurance premium?), look for the unknown things. Analyse every expense in your life and really ask yourself if it is worth having and why it is exactly you need it, then test it out. Spend a month without that expense and see how you feel. Is your life really that much worse off without it? If so, then by all means keep paying for it but at least then you’ll know that you haven’t just assumed that it’s a mandatory expense. Keep yourself on your toes and see how high you can get that number to go, then feel free to brag about it in the comments below
Some Final Words
This strategy is very general (as strategies are meant to be malleable) and so you will need to add in your own circumstances and decide what is most important to you. However it should be clear that this is simple and adaptable to most people. Most importantly is that there is now an official plan that you can simply pick up and run with when you want to kill that mortgage. If you’re excited and want to get started just focus on completing each section one after the other. Also know that you don’t have to achieve perfection in one section before moving onto the next. Get the main task of each section completed (set specific goals and challenge your assumptions, setup your loan with super low rates and fee’s, keep track of your expenses and your repayment percentages and push for 70%) and THEN you can spend more time refining them.
There are many more things you can do to help pay your mortgage off faster (as I’m always covering) however the big wins are all listed here. I’ve no doubt that this plan will likely evolve over time and I’ll add any updates to it as they evolve.
For now though, have you got any comments on how it could be improved?