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.
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!
- 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.