Today’s post comes from Alex. He blogs over at www.MutilateTheMortgage.com and is a fellow Australian based and focused financial site. Head over there to find out how to go from “no idea” to mortgage free in under 10 years!
Did you know that paying off your mortgage in 10 years can be setup quickly and is in fact very easy to do? It’s true! Just a quick alteration in how you pay your home loan can save you hundreds of thousands of dollars.
And that’s just the monetary benefits. By paying off your mortgage quicker you also gain better financial security, a less stressful lifestyle and a happier, richer life. Talk about a Big Win.
From start to finish it took us 6.5 years to completely pay off our mortgage. No more frugality. No more arguments about money. No more worrying about how to make mortgage payments or pay bills.
A single decision to change how you pay off your mortgage can be worth enough money to spend big on the things you love, like international travel, sending your children to private schools or even early retirement.
Your mortgage is the biggest debt you will likely have, which means by paying it off fast you can save more money than in any other decision.
Your Mortgage, Gone In 7 Years
We paid our mortgage off in 6.5 years and if I had known what I do now back then (what I’ll be sharing below for free) I reckon we could have done it in 5 years. We didn’t/don’t have $500,000 a year CEO salaries. We haven’t had inheritances, lottery winnings or any other type of windfalls.
We are both white collar workers that earn a respectable salary, but even on the average Australian wage (around $60,000 or so) you can do exactly as we did and pay off the same mortgage in only a few years extra, most likely in about 7-10 years.
Whether you want to travel the world ten times over or have the freedom to be a stay at home parent (and not worry about money!) paying off your mortgage is an amazing Big Win in life that’s available to everyone.
1. Create A Simple Plan
With the proper strategy, you can be free of your mortgage debt within a far shorter time frame than the “normal” 30 year period. Below are some suggested time frames for what you should aim for depending on your income and assuming a roughly $300,000 loan amount at 5% interest.
|Single Income Of:||Loan Term:||Fortnightly Payment:|
|< $70,000||15+ Years||$1,100|
|= $70,000||11-13 Years||$1,300|
|> $95,000||6-7 Years||$2,000|
|Couples Income Of:||Loan Term:||Fortnightly Payment:|
|< $140,000||7+ Years||$2,000|
|= $140,000||5-6 Years||$2,600|
|> $180,000||3-4 Years||$4,100|
Now obviously this is just a starting point but it gives you an idea of the types of time frames that are legitimately possible when you focus on paying down your debt. This will help you set a realistic goal based on what you earn as a single mother will have far less income than DINKS do.
Once you know your time frame you can easily calculate the required repayment amount using an online repayments calculator or just start with the suggestions above. When you know how much is required each fortnight, you can then get to work on hitting that target.
As an example, imagine John and Jane who both have a pretty standard income and the same $300,000 mortgage. Together they earn $100,000 before tax each year. A plan they put together might look something like this:
|Income after tax: $84,406 or $3,246 per fortnight|
|Repayments needed to pay off loan in 10 years: $1,467 per fortnight|
|Therefore they will aim to live on $1,779 per fortnight ($3,246 – $1,467)|
$1,779 per fortnight is $46,254 per year which is quite reasonable for two people to live on from my experience. To setup this plan isn’t hard. It doesn’t take special mathematical abilities, all you need to know is how much you earn, how much your mortgage is and a mortgage repayment calculator which you can find here.
Too often people think they need a perfect, 1000 step plan before they can start something but it’s really very simple and only takes about 10-15 minutes. And once you have your plan, you can get to work on the next step.
2. Set Repayments and Make Them Automatic
This is the meat and bones. 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. I’m not going to lecture you on not buying lattes or your favourite take out but money needs to be allocated to your mortgage.
The single biggest thing I learnt is to ignore virtually all the “experts” tips and instead focus all your effort on finding ALL available extra money and pushing that to the mortgage. I’m not talking about that once off $2,000 bonus or tax return or whatever, I’m talking about looking at your income and setting up an automatic, recurring payment to your mortgage that is made up of a sizeable chunk.
Think of figures like what’s mentioned above: $1,000, $2,000, $4,000 every fortnight. How you get that extra money is something I cover in detail at Mutilate The Mortgage (there are also many other great sites) but for now I’d just like to focus on the overall strategy.
To throw this serious cash at it regularly use “recurring payments” which is a feature you can setup in your online banking account. For example John might get paid every month on the 15th. He would then set it up so that on the 16th 50% of his pay is automatically transferred to his mortgage or offset account as an extra mortgage repayment.
At some point his normal mortgage repayment will be taken out too but this way he is adding more to his mortgage and still has control to increase/decrease the automatic extra repayment if needed.
By setting it up this way you achieve your goals at the same time as it all being automatic, hassle free and as painless as possible. After a while you don’t even notice it and you can just keep enjoying your life while you systematically cut your mortgage down.
3. Stay Motivated
Whilst it sounds like something you may shrug off, motivation 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.
Without it there’s sure to be something else to tempt your money away. You can know all the tips and tricks but if there is no motivation, no reason for you to do something you will simply do nothing and not care.
Find out why you want to pay off your mortgage faster and put that reason in a very visible spot so you never forget it. Then keep reminding yourself of that reason every few months by imagining what that future will look like.
Maybe use that reason as your “transaction description” so you see it each time the money is automatically transferred. Want to be mortgage free before you have children? Are you just sick and tired of being in debt? Whatever it is, make sure it’s clear and on display so you’re continuously motivated to reach your goal.
After setting up the initial automatic payment your main focus should be on finding more available income by cutting costs, earning more income and increasing efficiency. When you trim or save on your bills, up the amount of your automatic payment. When you get a raise or new job paying more, up the amount of your automatic payment.
A quote that I think applies very well here is one I heard long ago:
I do the things you won’t, so I can get the results you can’t
Most people don’t pay off their mortgage this way even though they absolutely can. Do the things they don’t, so you can get astonishing results no one else does.