Everyone Takes 30 Years to Pay Off a Mortgage. Right?

Back in my early 20’s, faced with a ‘giant’ mortgage and a job that left me feeling trapped, 30 years seemed like an eternity. It felt like a ball and chain that would drag me into retirement. Faced with spending my whole adult life (and more than I’d spent on this earth up until that point) paying it off, I devoured my step father’s investing library looking for a solution.

Up to then, I believed that everyone takes 30 years to pay off a home loan. I was wrong. Thirty years may be the loan term, but it doesn’t have to take that long. It doesn’t even have to take 25 or 20.

I learnt that Italian families paid off their loans much faster than other households in Australia. They grew their own vegetables, saving around $20 a week. This money was tucked into their home loan accounts and that’s how they slashed the time it took to repay their mortgages.

The best time to focus on your home loan

I became obsessed with figuring out how we could do the same and spent hours looking at the variables on a loan amortization schedule calculator. I knew that a $300,000 loan meant $600,000 in total repayments over 30 years.

Looking at the calculator it was clear that initially very little of our repayments would be paying off the principal. Most of our money was going against the $300,000 in interest the bank was going to get. Meaning that despite paying $23,000 a year or so in repayments the principal on the loan was reduced by a measly $3,000. Very little equity was being built in the first few years of the loan.

Loan amortization graph (Source: Credit Karma)

It turns out the best time to pay extra off a home loan is at the beginning. By reducing the principal as quickly as possible, more of the annual repayments contribute to paying off the loan, meaning less of it is lost to interest.

From that moment, our major priority became paying off the house. Well, that and renovating the house top to toe, getting married, going on a few overseas trips, buying a new car when the electrics in our old one started failing and deciding to freelance for a few years. Clearly it worked, because we paid the house off after a decade or so.

Despite knowing we’re living mortgage free, a close friend recently justified a huge expenditure by telling me that they would be paying off their mortgage for the next 30 years anyway so it didn’t matter. I was aghast. Knowing the couple’s financial situation, I was certain that if they wanted to they could demolish their home loan. Instead they seemed resigned to the 30 year time frame because that’s what everyone else does.

I want to tell you, it is just a mindset. You can pay off your loan as quickly as you want. This is great news if you’re considering buying a property, but are worried about being tied to a 30 year loan. It doesn’t have to be that way.

The ‘Debt is Normal’ Mindset

Australians are actually pretty good at paying off their loans early. Around half of all borrowers are ahead. The average household is paid up 1.5 years in advance, with around 15% of mortgagees having a buffer of more than 2 years.

One and a half years is a great buffer against the unexpected, but it’s not cutting much off a 30 year loan term which is the length of time most mortgages are repaid in.

Paying off the mortgage is the new Australian Dream. Yet tellingly, in the same survey that revealed this, participants said that if they were gifted with $50,000, most would put more than half of it against their mortgage. Half? If your dream is to pay off your mortgage, then why wouldn’t you put in the full amount? As the example above shows you would be almost doubling your money by reducing the interest payments.

So why half? Because most people believe it will be almost thirty years before they are mortgage free. Paying off a loan over your entire adult life is seen as a fact of life, which means most people don’t question this assumption and never really get ahead. This is the ‘debt is normal’ mindset. But is debt good? Do you want to have a mortgage your entire working life if there is an alternative?

There is an alternative and it starts with changing the assumption that a mortgage is for life. There are lots of people who pay their mortgages off in 10 or 15 years or less, because they believe it can be done. Just don’t expect your mortgage free friends to be shouting it from their roof tops. It’s a bit of a secret society because no one wants to seem abnormal!

Take Action

  • Liberate yourself from the idea that everyone has debt, so you don’t need to do anything about yours. Focus on making good decisions, not normal ones.
  • How soon would you like to have your loan paid off? Assess what you need to do to achieve this. Test the variables on an Amortization Schedule Calculator.
  • Much like the ‘pay yourself first’ principle; pay your loan first. It’s easy to believe that you’ll regularly make extra payments to your loan as you save more money. Realistically, this relies on discipline and memory. While my aim is to show you how to align your spending with your priorities, I’m also a big believer in automation. If you want to get ahead, increase your weekly repayments by a reasonable amount. That way, no matter what life throws at you, you will be getting ahead. And then if you save some extra cash, get a bonus or pay rise, you can decide to pay it off your loan if this is your priority.

How to see things more clearly

Disclosure: Links to merchants within this post may be affiliate links.

I’ve always teased my brother in law about his t-shirt wearing. Every week he wears the same couple of shirts on rotation for months at a time. He isn’t lacking in the t-shirt department either. He has stacks. I know, I’ve give him a few! But he always grabs the top one from the pile resulting in the same look week in week out, until he flips over the pile and starts the process from the bottom.

Not being able to see more than one layer down in your clothes drawer is a common problem. I know, because I’ve been asking to see everyone’s clothes drawers recently and they all look much the same; piles of shirts, pants and shorts stacked on top of each other, neatly or otherwise. But there is a better way to fold your clothes and this one allows you to see your stuff more clearly.

The Life Changing Magic of Tidying Up

I’d come across The Life Changing Magic of Tidying Up by Marie Kondo on the interwebs a few months ago. Although I was interested, I didn’t do much about it, figuring I wouldn’t get anything life changing from the book since I was already pretty good at tidying up. I’d also read a few reviews suggesting that the entire premise of the book could be summed up as ‘discard stuff that doesn’t bring you joy’.

It wasn’t until the slender volume caught my eye on the returns trolley at the library that I decided fate must have brought us together. Grabbing it off the trolley I realised I hadn’t brought my library card or any id.

Thankfully my friends came to the rescue, all the while sniggering at the fact that it was them who could use the advice not me. Having said that, they didn’t appreciate it when I read passages to them aloud to help them in their tiding challenges. Which is an interesting point; we are drawn to what we have an interest in already.

Essentially books like these are preaching to the converted. When we select what we read or watch it’s based on what affirms our point of view. It can deepen our understanding or present a new way of seeing, but rarely would a book or documentary be the catalyst for big changes. Generally, humans need crisis for that to happen.

Yes, the premise of the book is simple; ‘discard stuff that doesn’t bring you joy’. If you can take that and run with it to its’ natural conclusion, then the book probably isn’t worth your time. But if you adopt that philosophy and get stuck when you come across a shirt you used to like but don’t wear anymore or a book you bought last year, but haven’t gotten around to reading yet, then getting your hands on a copy of The Life Changing Magic of Tidying Up is worth it. That way you understand the reasoning behind the premise and are free to choose how you take action.

Initially I chose to ignore the advice on how to fold clothes. As a self-professed minimalist, I felt my cupboards were fine just the way they were. Then on a whim I tried it anyway and it’s been eye opening. I’m not a minimalist. Despite the frequent conviction that I don’t have anything to wear, I have a lot of clothes. I can see this now. And I’ve realised that there are two ways of seeing.

Two Ways of Seeing 

You see things both with your eyes and your heart. The contents of your closet physically exist and when you open the door you can see with your eyes what’s in there. Well, if it’s tidy enough. The contents of your heart encompass your life situation; your family, friends, the satisfaction you get from work, the things you enjoy doing in your spare time. These are trickier to see, because you need to bring them to mind and acknowledge them.

Seeing is essential to financial freedom. In order to achieve it, you need to make choices about how you spend your money. The road to financial freedom is paved with temptation and if you can’t clearly see what you have in your life, both with your eyes and your heart it always feels like you need more. Just like in your clothes drawer, if you can’t see the next layer down you will be tempted to keep on buying.

If your cupboards are in chaos and you can’t see what you have, then it’s time to get your house in order. That’s where The Life Changing Magic of Tidying Up comes in. First you surround yourself with the things you truly love and you are able to see that you have enough.

Take Action

  • Get your house in order. The Life Changing Magic of Tidying Up recommends handling each item to get an appreciation of how you feel about it and recognise all the stuff that you have.
  • Refold your clothes so that you can see what you own. Be warned, once you start you might find it’s a bit addictive and you just want to keep going.
  • To start seeing with your heart, not just your eyes, start a gratitude practice.

Making Financial Literacy Sexy

Financial literacy is probably one of life’s most valuable skills. In fact, improving financial literacy is seen by governments as critical. It’s so important, that I’ve noticed these ads appearing in the local paper:

Financial literacy course

Which totally inspired me to attend amongst an imaginary room full of socked and sandaled near-retirees. As useful as those seminars may be, they’re no place for a self respecting 30 something. It’s a small understatement to suggest that financial literacy has an image problem. It’s seriously not sexy. Just compare it to the credit card ads:

New Logo and Brand Positioning for Visa

Visa ad (Source: Under Consideration)

Financial Literacy Image Makeover

Financial literacy is actually sexy, because it provides power and control over your money. It makes you the superhero of your own life. You can start to make positive choices for you, not for the marketing machine that wants you to buy the next must have thing.

This result is:

  • Less stress;
  • Ability to make more positive choices;
  • A better work/life balance;
  • More fun and ability to enjoy your income.

Financial literacy is also an offset against the power of marketing. Basically, it tries to prevent you from making mistakes with your money. But the marketing is BORING with black and white government ads, budgeting and lots of talk about retirement savings. Not exactly engaging stuff. No wonder credit card debt in Australia is around the $32 billion mark. Yes, billion. That’s how much Australia spends on defence. The interest on that debt is around $5.5 billion.

Interestingly, Australians are already very confident in their ability to manage money. But confidence does not always correlate with good management skills if our credit card debt is anything to go by. The trouble is that according to a survey done by the Financial Literacy Foundation, stress and discomfort, boredom and disinterest, and personal relevance and procrastination, are commonly held attitudes and beliefs when it comes to managing money.

Fair enough. The process of getting control of your finances might not be totally awesome, just like every other big goal in life really. But the outcome, just like every other big goal in life really, is. It just needs a good marketing campaign. Maybe a few images. Something that is motivating enough to put the time and effort into becoming financially literate and managing your money. How about….

This is what financial freedom looks life?

Financial freedom!

Hmm, an empty box. That’s financial freedom? Well, yes. Financial freedom is about choice. How do you want to fill in that blank? By travelling. Working part time so you have more time to spend with your kids. Starting your own business. Retiring. It’s your dream. But it all starts with financial literacy.

The Virtual Classroom

If you slept through Financial Literacy 101 in school (did that exist?) or your parents never sat you down to have ‘the talk’ about mortgages, debt and savings you’re not alone. A family friend in his mid-twenties recently ‘confirmed’ with his dad that home loans don’t incur interest.

We’re very fortunate to live in the digital age, where we can enter the digital classroom in our pyjamas, glass of wine in hand and ask stupid questions from behind a suitable alias. If you need to brush up on your financial literacy or just get an ego boost, then a free online course might be the best end of year present to yourself. Here’s a few good one’s:

And my favourite book of all time is the Barefoot Investor by Scott Pape (Affiliate link). It’s such a simple straightforward non confusing book that tells it like it is. It’s made an awesome gift on several occasions. What can be more valuable than giving a friend knowledge to take charge of their finances?

If you are really struggling with money problems, a free financial counsellor may be able to help you budget. For further information check out ASIC Money Smart.

Do you feel financially literate? Where did you learn financial literacy?

Always Look Forward

Never mind looking back at the past year and wondering what went wrong, how about a whole period of your life? Have you ever wondered what you were thinking when you spent all your money in your twenties instead of saving and retiring at 30 like Mr Money Moustache? Or not buying a house before the boom? Or using credit cards for things you couldn’t afford?

In my mid-twenties I quit my job and decided to freelance. It didn’t really turn out as well as I had hoped and probably set us back financially. Even though I try to live by the ‘don’t look back’ philosophy, I’ve often wondered ‘what was I thinking!?’ Why didn’t I just keep working? Yeah I was very unhappy, but could it have been that bad?

I got my answer the other day when an old, seemingly unused notebook resurfaced. Right in the middle pages was a journal entry from that time. I quit because I felt stuck. Not stuck at work, but boxed in on all sides by career, family, finances, work, everything; myself included. I didn’t know how to get out, so I lived out my escape fantasy through freelancing.

Was it a bad decision? I’ll never really know because even though the freelancing didn’t turn out, I’ve been able to move forward and that’s the key.

Look forward to go forward

Things have a habit of popping up right when you need them. Just when I found the answer to why I left my job, Ramit Sethi posted an excerpt from Tim Ferriss’ new book Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers for Growth Lab readers.

The Four Hour Work Week was one of the books that fuelled my freelance escape fantasy, but I’ve never been too sure of Tim Ferriss. Maybe I have a more cautious personality. Maybe I’m more skeptical or maybe I just never had the confidence in myself to succeed like Tim, so I approached this new book with suspicion.

In 10 Keys to a Successful Business Tim interviews Marc Andreessen the co-founder of Netscape, gleaning his wisdom on succeeding in business. In Lesson #5 he hits on the issue I’ve been pondering for years. Here’s the exchange:

TIM: “What advice would you give to Marc, the 20-something, at Netscape?”

MARC: “I’ve never for a moment even thought about that. I don’t do replays well. The question I’ll never answer is, ‘What would you have done differently had you known X?’ I never, ever play that game because you didn’t know X.

TIM: “So that’s how you feel?”

MARC: “Forward, like: We don’t stop. We don’t slow down. We don’t revisit past decisions. We don’t second guess. So, honestly, that question, I have no idea how to answer.”

It says it all. Always look forward.

It’s so easy to second guess decisions you’ve made especially when you were young. You beat yourself up over stalled years and mistakes and vow to move forward. The only trouble is, that it’s very hard to move forward while dwelling on the past. Wondering why you didn’t do things differently. If only you’d known X.

The only way to move forward is to live in the present moment, with what you know now; where you are currently at.

Marc’s view struck a chord because dwelling on past decisions has caused me to doubt my ability to make the right decisions in the present. And as I found out, when viewed through the eyes of the present, the past looks very different now to how it appeared when you were living it.

Personal finances are like a ship that you steer throughout the course of your life. You’re in it for the long haul. You set out in early adulthood in a direction that’s influenced by your childhood and situation. You sail onwards until something comes along to change your course, be it experience, wisdom or the internet. When your course changes, you are where you are. Not 100 nautical miles back, but right in the patch of ocean you’ve sailed to. The only set of circumstances that matter are the ones you’re facing right now. The key is to set a course in the direction that will send you forward from here. Where will that be for you?

*Please note this post includes affiliate links.