Most mortgages last for 30 years, but how good would it feel to pay it off much sooner?
Three personal finance experts shared their top tips on how to halve the time the typical mortgage takes to pay off to enjoy the bliss of more financial freedom.
1. Pay more than the minimum repayments
This doesn’t mean you have to double your repayments; but by adding another two-thirds, you’ll shave 15 years off your loan, says Max Phelps, money coach and founder of finance business Golden Eggs.
“To break this down, a $500,000 loan at 3 per cent over 30 years has repayments of around $2100 per month,” he says. “Two-thirds of this is $1400 per month, so you would need to pay just under $3500 per month to pay it off in 15 years, assuming constant interest rates.”
2. Cut back on the small stuff
Two bought coffees a day might cost $10 which is $50 a week and over $2500 in a year which, in after-tax income, could mean you’ll have to earn $5000 a year to pay, points out mortgage broker Justin Doobov of Intelligent Finance.
“It’s just like wanting to go on a diet but then having a Tim Tam here and a cupcake there and soon the weight piles on,” he says. “So you need to have discipline and have a look at all your micro-spends. They’re particularly dangerous when you’re using a tap-‘n’-go credit card, so you don’t notice all the expenditure.”
3. Review your loans regularly
Get into the habit of reviewing your loans every three years, recommends Andrew Zbik, senior financial advisor at CreationWealth. Go to your existing bank and ask for a better deal or consider shifting to a new bank and the savings you can make could be substantial.
“Seek out a lower interest rate and a better deal,” he says. “There’s no loyalty any more. It’s up to you, maybe with the help of a mortgage broker, to find a deal where you might be able to save $4000 to $5000 a year.”
4. Don’t take on too big a home loan
Banks may offer applicants the maximum they can afford, but Phelps recommends accepting a loan for no more than four and a half times your gross income.
“Then put half your net pay towards the loan,” he suggests. “We’ve found that people typically spend 30 per cent of their income on rent or a mortgage, and also that most people can save 20 per cent of their income, if they budget properly.”
5. Rethink your big ticket spends
It’s worth considering whether you really need that extra-big TV or that new car, says Doobov. “If you don’t spend $10,000 on something, then you could put it in an offset account, and it would mean you’ll be saving $300 a year in interest.
“You can’t just think of the cost of something you’re planning to buy. You need to take into account the opportunity cost too.”
Decide to invest in something else too
If you want to halve the time it takes to pay off your mortgage, it helps to do something extra, and that might be investing in another property and selling it later, or putting money into a share portfolio.
“The idea is to use your savings to invest with,” says Zbik. “And then after a 10 to 15-year commitment, and they’ve made a substantial gain, take your cash out.”
He warns, however, that you might need to pay tax on the capital gain.
7. Budget effectively
It helps to have a solid plan to manage your money better. Phelps’ Five-2 Money diet involves opening five separate accounts across two banks, each for a different purpose.
“Commit to the ‘plus-two-thirds’ level of repayments as a bill and pay it from a separate bills account, with no card access,” he says. “Then use a separate bank account with a different bank with a weekly allowance to spend from, so that the bills money is out of sight and out of mind.
“Another account is for your future, paying off debts, another is for holidays – as holidays are awesome and we all need those – and the last is for paying for things like haircuts and clothes and gadgets and weekends away.”
8. Don’t try to keep up with the Joneses
Avoid the temptation to scroll through Facebook looking at other people’s holidays or cars, advises Doobov.
“There are so many activities you can do that are free – you don’t need to spend money to have fun,” he says. “Australia’s a wonderful place for having an awesome day on the beach playing around in the waves or going to a great park.”
9. Set up an offset account
Make sure any spare cash you have goes into an offset account attached to your home loan, advises Zbik. Any money in an offset account reduces the balance used to calculate interest. The more money in the offset account, the less interest payable.
10. Find some extra income
There are lots of ways of improving your income, even if you don’t win that promotion you were hoping for. Phelps suggests renting out a spare room, hosting international students when they return to Australia, asking for a pay rise, or taking a second job.