This is Mutilate The Mortgage, so it’s safe to say we’re pretty big fans of paying off a mortgage early over here. I’ve written about it extensively for years now. However it’s always good to stop and ask: Why?
It’s a question anyone with kids is sure to be familiar with and it’s a very important one. When you’re paying off a mortgage, you’re committing a fairly huge portion of your money towards it.
It’s taking you multiple years to complete so you want to be sure that you’re doing the right thing. As such I thought it’d be a good time to fully investigate exactly why we here at Mutilate The Mortgage believe firmly in paying off your mortgage as early as possible.
Why Bother At All?
Many people honestly don’t even think about their mortgage. Given you’re here at MTM I’m guessing that’s not the case, but it’s unfortunately a sad reality.
It’s one of the main reasons our Big Four Banks are so profitable. For a $400,000 mortgage that’s paid off over the normal 30 year period, even at a quite excellent 4% interest rate, you’re still forking out almost $300,000 in total interest.
Given about a third of Australian houses have a mortgage it’s no wonder they’re raking in the profits. The thing is though, minimising this huge interest burden isn’t all that hard. As I’ve discussed before, solving this is as straight forward as throwing an extra $240 a week at that same $400,000 loan and watching the loan term halve.
This type of simple, easy adjustment will give you pretty much the best bang for buck results in your life. Where else can you spend as little as 30 minutes setting up an automatic payment online and save yourself over $150,000???
First Reason: because it’s one of – if not the best – exchanges of time for money you’ll ever see.
Why Not Invest Instead?
One of the most common counter arguments that comes up when you tell people you’re paying off your mortgage early is investing. Why use your hard earned money on a loan at 4% interest when you could be earning 10% from shares with it?
While I’ve covered this slightly before, the absolute biggest reason to think twice about this is that investing is uncertain. Returns can be 4%, 20% or -30%. You have no way of knowing if you’ll end up better and that’s assuming you’re a competent investor who knows what they’re doing!
The vast majority of people lack the financial knowledge to properly navigate the share market world often making dangerous bets on single companies. Contrast this to your mortgage which is 100% guaranteed to give you a return that matches your interest rate.
On top of that guaranteed return it’s also a tax free return too. If you’re here in Australia and earn $90,000 or more you’ll be in the 37% tax bracket. That means if your mortgage is at 4%, you’ll need a 4 / (1-0.37) = 6.35% shares return to match that same 4% return.
When I go and look back over the years that we paid off our loan technically speaking we would have “made” more money investing in the ASX200 as it’s had a better return over the years. It returned roughly 7.5% over the 6.5 years we paid off our loan.
Even when you take the taxes we would have had to pay it’d still have been slightly better than the average interest rate we had on our mortgage. However that’s in hindsight and there’s no telling what the markets will do over the next 6.5 years!
So while you may choose to invest instead, know that it’s a significant risk if you’re not fully up to speed on how to invest safely and for the long term. If you are up to speed, then it’s still more risky than your mortgage and a lot more paper work too!
Second Reason: because it gives you a 100% guaranteed, tax free return equal to your mortgage interest rate with zero hassle, zero risk and zero financial knowledge required.
The Flexibility To Live
If you’re anything like the average person you’ll have dealt with student loan debt, credit card debt, car loans, mortgages (obviously) and possibly even business or personal debt too. One thing all of these things do is restrict us.
While you usually have to work so that you can afford food and such, these costs aren’t that high once you take mortgage repayments out of the equation. So once you’re 100% debt free it’s extremely freeing.
Not only does it take a lot of the pressure off from working day to day, it can allow one of you to stay at home with the child, study full time towards a higher paying career or even build up a business of your own.
It also serves as a financial cushion if one of you looses your job or any other type of financial/life “hit” happens. No one likes being diagnosed with an expensive medical condition or having to go through a nasty divorce but these things do happen in life and being financially secure goes a long way to helping you bounce back.
On top of this that same financial stability often helps to avoid those types of big events in the first place. Money is often sited as one of the top reasons for divorce so it makes a lot of sense to ensure your financial standings are as rock solid as they can be. If not for you, then for your children and immediate family.
Third Reason: because it enables you to be more financially stable, open up options you wouldn’t have had, endure hard times better and even helps prevent common life issues from happening at all.
And A Whole Lot More…
These are just some of the best reasons, there are many more out there. Intangible things like being able to sleep better at night due to lower stress. Being able to focus more on your retirement savings and thus have a better quality retirement.
It can even lead to better performance at work as people are more likely to take risks and impress when they know they have solid financials at home. Not to mention with less to worry about at home you can focus better at work.
To the many that don’t even think about their mortgage it’s a big step to see what’s on the other side of the fence. However paying down your mortgage isn’t hard and depending on how much effort you’re willing to put in it can take anywhere from 15 to 5 years.
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It’s a long game to play for sure even with that shorter 5 years time frame but there’s no doubt it’s a big win in life. A big win that often sets you on a new path of success and increased prosperity for both you and your family. So what’s your reason? Let us know in the comments below and then get mutilating!
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).