Worried about your mortgage payment?
Mortgage stress is one of the biggest concerns for Australian families, however, my wife and I fully own our home, plus we paid it off in just 6.5 years.
At $400,000, it wasn’t exactly a small home loan and we haven’t had any big windfalls or an inheritance. It was paid off completely through our own hard work and no, we weren’t earning six figures, in fact we bought the house about 6 months after we both graduated from University.
When hearing stories of other people aggressively paying down debt, you could be forgiven for thinking we slept on the floor, ate rice and never turned the lights or heater on. But you’d be wrong. We lived and still live just like you.
We enjoy weekly sporting activities, go out most weekends and drive a car we bought brand new. Now, I don’t reveal all this to brag – it’s not like we’re driving around in a Lamborghini or buying $5,000 shoes – but we do live very comfortably and never stress about our mortgage payments…mainly because we don’t have any!
Neither of us knew how to do all this when we started out with our mortgage. However I am an engineer, so one thing I do know very well is numbers. When we took out our $400,000 mortgage, we were paying off the minimum amount, plus an extra hundred dollars or so per fortnight.
As we found a few spare dollars here and there we would up the repayment amount more and more and watch the term of the loan drop. Eventually, the light bulb went on.
Put simply, when we worked out our income and expenses we realised that we could pay off the entire loan very quickly if we made it a real priority. We became more and more aggressive in increasing our repayment amount.
Every time we got a pay rise or expense reduction we increased our repayments by that same amount and just kept living as before. Bit by bit, we climbed higher and higher with our repayment amounts and consistently ate away at the principal.
The trick is to not ‘set and forget’ your mortgage. Many people focus on small daily costs because they are the most visible: petrol, food and power bills we pay every day. But when you give as much attention to your mortgage, you start treating it as another bill to chip away at.
Let’s face it, your mortgage is probably the biggest expense in your life and, as such, carries with it the biggest costs to save on. Why worry about the rising cost of petrol and saving yourself a few measly cents at the pump when you can save yourself 20 years of loan repayments and $100,000+ in interest?
Now, I admit we are two professionals on a higher than average income and no kids, which is of course the optimal scenario and results in paying off a loan quickest. However, even with children, a single income or lower than average incomes it’s still quite simple to pay off an average loan surprisingly quickly.
Let’s say you and your partner earn $70,000 per year each (less than the average Australian wage) and have a $300,000 loan at 4%. It is possible to pay it off in just over 9 years by committing 40% of your after tax income to your mortgage.
For most, paying off their mortgage in under 10 years is an absolute dream result. Literally. I’ve heard people say to me in person “it would be a dream” but we’ve proven it’s possible to go even further and still live very comfortably.
We consistently put more than 70% of our after-tax salary towards our mortgage over the years, enabling us to pay it down substantially. In the above scenario you could pay the $300,000 loan off in less than 4.5 years by doing the same!
Step 1: Reviewing Expenses
To pay 40%, 50% or even 70% of your after-tax income off your mortgage, you first need to know your after tax income and your expenses. Most people know their after-tax income, however when it comes to expenses, few keep an accurate track of what they’re spending.
My wife and I try and spend money almost exclusively through debit cards so all transactions are automatically recorded online. From there you can download a few months (or years) worth of data and go through it. Most people shop at the same places, particularly for things like food or petrol, so it’s not that hard to get a decent estimate on how much you’re spending in each area.
Once you have an estimate on your total expenses, subtract them from your after-tax income. The remaining amount is what you can add to your mortgage repayments without changing anything in your life. Even as little as $100 a fortnight it makes a significant difference to your loan term and the amount of interest paid overall to the bank.
One of the big keys to this method is setting up an automatic repayment for your mortgage. Have it transfer the money automatically a day or two after you normally get paid. This way you’re automatically doing the right thing and over time when you get a pay increase or your expenses decrease, you can easily and quickly adjust the automatic repayment for that extra amount.
Not only does this help you relax and enjoy your life more, but it also ensures that you’re being consistent instead of only making an extra repayment during tax time or when you “find” spare cash.
Step 2: Maxing Out Your Repayments
Once you’ve got a certain amount automatically transferring into your mortgage you can then focus on optimising and increasing your repayments more and more over time.
Make it a rule that any time your wage increases you increase the automatic repayment by that exact amount. Make it a rule that any time your expenses go down, that you increase the automatic repayment by that exact amount.
For example if you are earning $70,000 a year and get a raise to $73,000 a year, that equates to a $2,025 increase in pay after tax or an extra $78 per fortnight. In this instance I would simply login to our bank account online and increase the automatic repayment up $78 after the pay rise has gone through, then we’d just act like nothing ever happened.
Using this automatic repayment method allows you to really free up your time in order to focus more on cutting down your expenses one by one. Start with the highest ones and go through them over time always adding any gains you make to the extra repayment each time.
Manage to negotiate $300 off your car insurance? Up that repayment! Switch your mobile contract to “SIM Only” and save $30 a month on both your mobiles? Great! Up that repayment! While it’s different for everyone, you can be efficient and still live a very healthy and full life whilst spending a fraction of what everyone else does. All it takes is knowing what your expenses are and making sure you truly need all of them.
Step 3: Monitoring And Motivation
The final step is ensuring that you stay the course over the many years. Regardless of how quickly you pay down that mortgage, it’s still going to take a number of years and it’s very easy to forget why you’re doing it. For some it’s just about being more secure, ensuring that they own their house, a valuable asset that no one can take away.
For others it’s about fully owning their home before they start a family. Imagine being able to take time off work without having to worry about income draining mortgage repayments. However, no matter your reason for wanting to pay off your mortgage sooner, it’s important to keep that reason front of mind. Stay motivated!
Another great tip my wife and I used is to know our mortgage pay-out date. While paying it off we were eagerly tracking and counting down the days until we fully owned our house. It also meant that each time we added more to the repayments, we could clearly see how many days closer we were to our goal. This ends up being quite addictive!
A Bright Future
For us, paying off our mortgage means security, simplicity and the accomplishment of being debt free. There is the argument that investing any extra cash in shares can return more money over time, however, the dream of not having to worry about mortgage repayments is paramount to us personally.
Also now that we fully own our home, the 70% of our income that was going towards the mortgage is now being saved and invested. This will allow us to pursue any life path, such as continuing to work, being a stay at home parent, overseas travel or even retiring early!
The important thing to remember is that paying your mortgage off early is possible for everyone. It doesn’t have to be a stressful, multi-decade ordeal. Depending on your income and mortgage size, you can take years off your home loan by following these very simple steps. It isn’t the easiest path, but it will help set you and your family up for a secure, relaxed and prosperous future.
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).