What’s Critical And What’s Worthless
5 fast tips to pay off your mortgage faster!!!!
12 great ways to kill your mortgage!!!
163 mega-quad-zillion things you can do every day to reduce your home loan!!!!!
Do you REALLY want to be doing tons of useless things all year to “pay off your mortgage faster”? Or would you rather do what’s RIGHT and what has the biggest impact… then get on with actually living your life?
I know I don’t like to do useless crap when I don’t have to (perhaps because I’m such an efficiency Nazi) so read on as I set out what we’ve found to make the most difference and what things you can just plain ignore.
I’ve decided to sort some of the most common myths/comments/thoughts/suggestions into three categories to make it easier for everyone. If you simply want to do the bare bones minimum whilst 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.
Things That Are Critical
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 and years but without throwing large percentages of your income at your mortgage consistently… it’s going to 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, reoccurring 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 and increasing efficiencies. If this seems like it’s “going too far” then I’m afraid you’re just not being realistic. You likely have a finite supply of money and if you truly want to achieve the goal of paying off your mortgage faster than the bulk of that money will have to be assigned to the mortgage. I posit most people can strive or get to 70% of their after tax income.
Motivation. Whilst it sounds like something you may shrug off, it is in fact very critical. Even if you’re destroying your mortgage and only needing 5 years to pay it off… that’s still 5 years you need to keep up your motivation because without it there’s sure to be something else to tempt your money away. Find out WHY you wish to pay off your mortgage faster and put that reason in a very visible spot so you never forget it. 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 that no matter what happens, no one can take it away from you? Whatever it is make sure it’s clear and on display so you’re continuously motivated to reach your goal.
Cutting costs and increasing efficiency. The more of this you do, the sooner you will pay off your mortgage. it’s that simple. It also has the added benefit of often simplifying your lives and making you happier. On top of all that it’ll mean that when you save for retirement you won’t have to save as much not to mention being more efficient is far better for the environment.
Never redraw money off your mortgage. There may be some exceptions to this rule but it should only be for true, true emergencies. I’m not talking about a hot water heater failing and costing $1,000 to repair, hopefully you should have an emergency fund for those sorts of hiccups. The true, 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. True emergencies. 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
Have an Offset account. 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 all the extra fees they’ll likely tack on because of it. That being said if it does save you money off your loan it’s not likely to be a huge amount when compared to the critical things above.
Review and possibly refinance your loan. Keep an eye on your loan’s interest rate and at least once a year review it. Rates change and banks also change their deals, it’s quite likely you could talk with or negotiate a better rate even with your current bank just by asking. Whilst refinancing shouldn’t be done repeatedly it is a good thing to do once you’ve run all the numbers and are confidant it’ll save you money.
Don’t pay for features on home loan 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 and 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 have an offset account… but you have $0 in it).
Park lump sums in your mortgage account. We all know the math (at least I’d hope by now), $20,000 parked in your mortgage at an interest rate of 6% will save $20,000 * 0.06 = $1,200/year in interest. Yes it makes a little difference to your mortgage, you know what’s better than saving $1,200 a year in interest though? Setting your repayments higher and make 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 typically use 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. When most people look at this on a repayment calculator they think there’s a huge savings in interest and a free lunch however there is only a very little saving (think around $32/year for a $250,000 loan @ 7.50%). Where this does save a bit more off your mortgage though 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 whilst reducing your interest.
Things That Do Nothing
Make lump repayments or mini lump sum repayments. 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 or whatever that 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 the $600 “Loan approval fee” at ANZ) but you then also pay interest on that fee. Now I’ll be the first to admit the math behind this is sound, a whopping $600 fee at say 7% amounts to $42 extra you’ll be paying every year… not something I’d like to do but these types of tips do effectively nothing in the grand scheme of things. When compared to even the “little things” above they make very little difference and so can basically be ignored in my view unless you want to spend all your days and nights pining over your mortgage. Also if you ARE happy to spend that much time on killing your mortgage, you’d be better off finding every way possible to cut costs and increase efficiency.
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 year round. Ignore finding “special times” or special reasons to make a higher payment and make paying higher the default. Then push and push for that 70%+ goal.
There’s a LOT of these junk types of articles/posts out there however few of them hit home at just how important those above critical things are. To put it into perspective parking that $20,000 into your mortgage or offset account might save you $1,200 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 $322,888 and 21.75 years off a $300,000 loan @ 7%.
So when you read these pieces feel free to take their advice and save that $1,200 or $42 per year… just make 100% 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 $322,888 per year after tax (or around $540,000/year before tax) to do that one job. Not bad huh? Is that enough of a pay rise to get you started?