How do you pay off a mortgage in 5 years?
When we first started with our home loan I didn’t have much of an idea what to expect. I didn’t have any specific type of “plan” to follow besides the social default of pay it off for 30 years. It took me quite a while to suss everything out, learn what matters and what doesn’t. Now I’m fully confident at paying off a mortgage really, really quickly.
I’ve often said that if I had this website from the day I started paying off our mortgage it would have only taken us 5 years not 6.
A year or so ago I sat down and wrote out a very detailed and non-specific post entitled The Official Mutilate The Mortgage Strategy. If you haven’t read this I’d highly recommend you do. It’s the main theory behind the more detailed figures below. Once you’ve read it, come back here and this post should make more sense.
Although the article above is very general and does cover the below case, I thought I’d run through specific figures. Hopefully it gives everyone a better understanding of how it’s done with a specific use case. If you’d like, feel free to post a comment below with other starting details and I can do another article if those are popular.
This specific 5 Year Plan is for a couple that has the following:
- Combined income of $150,000 (50/50 each)
- No children
- Want to be debt free within 5 years so they can do _______
A very common issue with paying off a mortgage so quickly is that it “can’t be done” with children. Well besides from the fact that it can be done, in this scenario I would imagine the couple might want to pay off their mortgage first in preparation of having children.
According to the ATO’s Simple Tax Calculator:
|Jack’s Base Income: $75,000.00||Jill’s Base Income: $75,000.00|
|Jack’s Current HELP Debt: $0.00||Jill’s Current HELP Debt: $0.00|
|Jack’s Annual Tax: -$15,922.00||Jill’s Annual Tax: -$15,922.00|
|Jack’s Take Home Pay: $59,078.00||Jill’s Take Home Pay: $59,078.00|
Total Income After Taxes: $118,156.00
Total Income: $4,544.46 / Fortnight
Normally I’d run out a big long list of expenses you might have. Ultimately it really doesn’t matter as they should only account for 30% of your after tax wage or $1,363.34 per fortnight in this example. If they don’t, get to work on cutting those expenses!
As 30% is going to expenses, 70% should be going to the loan or $3,181.12 per fortnight. Given their goal is to have their mortgage paid off within 5 years we jump over to a Loan Repayment Calculator and punch in the figures.
I’ve assumed an ongoing interest rate of 5.5% p.a. here. Do note these historically low interest rates likely won’t stay around much longer. It’s quite likely interest rates will rise to 8%+ in the future. Regardless, at 5.5% and repayments of $3,181.12 per fortnight it shows this mythical couple can borrow $360,000 and pay it all off in that 5 years.
Assuming that this is a 80% loan to value ratio mortgage (ie. the mortgage is only for 80% of the total cost of the house) this means we get a house valued at $360,000 / 0.80 = $450,000.
So in the end this couple can rock this exact plan and be free in 5 years if they:
- Put 70% of their after tax wage to their mortgage
- Buy a $450,000 house with a 20% deposit ($90,000) or otherwise end up with a $360,000 mortgage
And that’s it!
It might seem like a pretty “light on details” plan. That’s because at the heart of it paying off your mortgage IS very simple. Force that repayment amount to 70% and burn through that mortgage as fast as you can!
There are ways to live a very comfy life on $1,363.34 per fortnight when you have no kids. If this is where you’re having issues read the other posts on decreasing expenses and focus on that. I’d strongly recommend just upping your repayments to 70% of your after tax pay and seeing how you go. So long as you have a free redraw or offset account that you can easily get the money back out of if things are really sticky.
As mentioned before, feel free to shout out in the comments some other scenario’s and I’d be happy to draft them out in other Use Cases posts.