Building wealth isn’t about necessarily ‘going without’ or being in the top income bracket – it can be as simple as paying down debts quickly and adopting a prioritising approach to expenditure.
Mortgage is the largest debt you’ll ever face, it makes sense to tackle it aggressively if you want to take control of your financial future.
Owning your own home costs more than ever these days. The Australian median house price has more than tripled in the past two decades1. And because your mortgage is the largest debt you’ll ever face, it makes sense to tackle it aggressively if you want to take control of your financial future.
Household debt is a huge problem, and latest figures show it’s not an issue confined to low-wage earners. When it comes to the 20 percent at the lower end of Aussie incomes, a quarter spend more than they earn and one in five are unable to pay their bills on time. However, the same statistics show that almost 8 per cent of Australia’s richest households are also living on credit. So being in debt isn’t just about income levels – it’s about spending habits, budgeting smarts and forward planning2.
Change your approach
It’s easy to adopt the default position of planning to pay off your mortgage in 30 years. But do you really want to spend half your adult life paying interest to a home loan lender? One of the quickest ways to build wealth is to obliterate your ongoing debts – and for that you need a plan.
Changing our ‘spending is good’ mindset is difficult in the consumer age, but it’s important to know where your money is going. Take a look at what you spend your money on and then ask yourself if that expenditure is making you happy. Are you spending on experiences (such as much-needed holidays) or non-necessities that aren’t adding much to your wellbeing?
Take a look at what you spend your money on and then ask yourself if that expenditure is making you happy.
Is Foxtel or Netflix crucial to your quality of life? Do you really need three iPads? Does that unused boat in your garage constitute a sensible purchase? Is private schooling for your children really worth what you’re paying for it? Paying off your mortgage early is simply about prioritising. Are you proactively hammering away at your biggest debt, or simply adding other debts and expenses to your life?
Test your new spending strategy for 30 days
Don’t believe it’s possible to put 40 or 50 percent of your after-tax income into your mortgage every month? How do you know if you haven’t tried it? Do you know your total monthly (non-mortgage) expenses? ASIC’s online budget planner can help with the calculations. You won’t know which expenses to reduce or eliminate until you understand your spending.
Recent surveys show that Australians with a mortgage need (on average) 27 percent of their income to make repayments.
Recent surveys show that Australians with a mortgage need (on average) 27 percent of their income to make repayments. Where you live makes a big difference, however. Sydney homeowners require 35.1 percent of their income while Brisbane residents are only spending 23.4 percent as of March 20153
Try some ‘household austerity measures’ for a month and see which ones you can live with long-term. And while you’re doing it, think about all that interest you’re saving. Reassessing your expenditure can even lead to a healthier lifestyle: if you quit smoking, spend less time sitting in front of video screens, reduce your booze bill and substitute fatty takeaways with home-cooked meals, you’ll have more cash to apply to your mortgage – and create a new you at the same time!
How a home loan offset account can trim your mortgage over time
A mortgage offset account is a transaction account (much like a standard savings account with a bank card) that is opened when you set up your mortgage and is linked to the loan. The money in this account is offset daily against your loan balance, thereby reducing the mortgage interest accordingly. For example, if you have a $200,000 home loan and $26,000 sitting in your offset account, you are only charged interest against $174,000.
The more money you have in your offset account, the more you’ll save over the life of your loan in interest payments – potentially chopping years (and thousands) off your mortgage. Offset accounts allow you to build up your savings while reducing the term of your home loan. An effective offset account uses 100 percent of the balance to offset your loan, has an equal interest rate to your mortgage and has no balance limit4.
The more money you have in your offset account, the more you’ll save over the life of your loan in interest payments – potentially chopping years (and thousands) off your mortgage
You can capitalise on the benefits of an offset account by putting your pay directly into it. And if you’re self-employed and putting aside money toward your required GST payments, your offset account is a great place to store those funds until you need to pay your GST.
If you are disciplined in paying your bills on time, you could also consider putting your major bills on your credit card and take advantage of the card’s interest-free period, leaving the money in your offset account and then transferring it out just in the nick of time before your interest-free days are up. Of course you need to ensure you clear the credit card at the end of the interest-free period otherwise the debt you’re trying to wipe out will actually increase.
Pay your home loan more regularly
By the simple expedient of paying once a fortnight, you’re adding the equivalent of a whole extra month’s repayment into the calendar year, which helps you pay down your principal more quickly.
Most home loans are based on monthly payments, but your lender may offer the option of paying weekly or fortnightly. It’s a great way to sneak some extra payments in during the year. Let’s say your minimum monthly repayment is $1500. Over 12 months, this means you’re paying $18,000 in repayments annually. Now if you halve that $1500 payment and pay $750 a fortnight instead, your yearly repayments now total $19,500 because there are 26 fortnights in a year.
In other words, by the simple expedient of paying once a fortnight, you’re adding the equivalent of a whole extra month’s repayment into the calendar year, which helps you pay down your principal more quickly. Over the course of a 25-year loan term, this could trim tens of thousands of dollars and several years off your mortgage.
The good, the bad and the unexpected
Being able to meet mortgage repayments requires that you are prepared for whatever life throws at you – and life insurance products can help you cope with unforeseen circumstances
Life is full of surprises. When a plump tax refund, a well-deserved work bonus or an inheritance comes your way, it can be prudent to put that windfall straight into your mortgage. But sometimes the unexpected comes in less pleasant forms. If you pass away, become seriously ill or have to take time off work to care for a sick child or spouse, how will you be able to continue to make mortgage repayments and meet the rest of your financial obligations?
An appropriate life insurance policy can help provide financial security in the event of death, providing a lump sum payment to the beneficiary to help cover ongoing costs such as your home loan, everyday living expenses, education costs, etc. Having a suitable level of life insurance cover ensures the remaining partner can continue to pay the mortgage and other commitments without undue hardship.
Have you thought of how you would cover your mortgage if you couldn’t work – either temporarily or permanently? What would happen to your home? In these situations, TPD (Total & Permanent Disability) Cover and Trauma Cover can offer financial protection. Another important insurance consideration is Children’s Cover, which is designed to cover you if you need to take time off work to support a sick child. Being able to meet mortgage repayments requires that you are prepared for whatever life throws at you – and life insurance products can help you cope with unforeseen circumstances.
Conquer you mortgage – don’t let it conquer you
Imagine that lovely day somewhere in your future when you’ve finally paid off your home loan. You now own your house, you’ve taken care of your biggest debt and have more financial freedom than ever. It’s a great feeling and a great day, and the quicker it comes, the happier you’ll be. But it takes work and you have to be on the ball. Strategies such as increasing payments when interest rates are low and more stable, and making use of a redraw facility or reviewing/refinancing your loan if it becomes less than optimal can be beneficial.
Make sure you fully understand the mathematics of how much you’ll save if you trim 2 years, 5 years or even 10 years off your mortgage – the amounts will truly astound you. You don’t need to compromise your lifestyle or win the lottery to pay off your mortgage ahead of time – you just need to think ahead.