There are all sorts of benefits to getting rid of mortgage debt for good. Find out why paying back your mortgage faster can help you and your finances and how to go about it.
When you’re a homeowner, getting in the clear with debt can take decades. With some lenders prepared to offer you a home loan for a 30-year term, you’ll be paying off more in interest than the amount you originally borrowed, if you stick to minimum repayments for the full three decades.
Finding motivation to make your mortgage a priority
You might think saving many thousands of dollars would be a big reason for many people to dedicate more income and effort to paying off their mortgage early. Jeremy Chiel CFP®, Partner and Adviser with the Stonehouse Group says significant interest savings are infrequently the most effective motivator for his clients. “It’s when you ask people the question ‘what would you be able to do differently without a mortgage to pay back’ that things shift,” says Jeremy. “Clients start to see why it could be an important goal for them when they realise they can do something different in terms of lifestyle.”
Not only does having a mortgage tend to limit blue-sky thinking on big lifestyle goals like going overseas, it can stop you from having the freedom to live a little, here and now. “Even people paying a modest mortgage often place restrictions on doing something new, even if that activity is relatively low cost,” says Jeremy. “In my professional role I’ve definitely seen how a mortgage limits the scope of what you feel able to take on.”
Being in a position to plan
While breathing a sigh of relief may be enough reward to make mortgage freedom a goal worth pursuing, it can bring other benefits too. “No longer having those mortgage payments in your budget can free up funds to start investing,” says Jeremy. “That creates the potential for a passive income in the future, which allows for interesting lifestyle planning opportunities. It also helps with the retirement planning piece. With no debts to service, you can get more specific and clearer around what your financial future after leaving work will look like and when it can start.”
Tips for getting ahead with repayments
Once you’ve recognised how much you can expect from getting the mortgage monkey off your back, now comes the tricky part. Actually finding the budget to make extra payments can be a struggle for many singles, couples and families.
Here are Jeremy’s top three tips for squeezing a little extra from your budget with as little effort as possible:
– Pay fortnightly
This is one of the simplest mortgage hacks and something you can do from the very beginning of your loan. If you haven’t already started making payments fortnightly instead of monthly, switch as soon as you can. You’ll effectively be getting ahead on your home loan by one monthly payment every 12 months. It won’t feel like much but could bring your mortgage-freedom date forward by years.
– Round up regularly
In addition to paying fortnightly, look at rounding up the amount you’re paying each time. Even if it’s to the nearest $10, it’s worthwhile – although the nearest $100 will make a much greater difference if you can manage it. And if cash flow is really tight, consider rounding up to the nearest $1000 once a year for your total annual payment. You could look at making a habit of this when you have a windfall – either at tax time or if you receive an end-of-year bonus.
– Get a better rate
It may take a little more time than the other two options, but the impact can be far greater. Shave a few percentage points off your interest rate with a new provider, but commit to the same repayments as with your old lender and you’ll find that loan shrinking faster as a result.
Barriers to mortgage freedom
So what generally stands in the way of clients following the path to becoming mortgage free? “Many homeowners get tempted to upgrade as they build up equity,” says Jeremy. “They might trade up to a bigger home, in a better location. Or they might draw down on the value of their home to renovate or even do all three. To achieve any of these goals they’re going to be borrowing more, and potentially starting with the maximum loan term all over again.”
Sometimes it’s lifestyle choices that can get in the way of making your mortgage a priority. “If you place greater value on travelling with your kids or paying for their education, maybe the mortgage should take a back seat,” says Jeremy. “Every family has different priorities. It’s about getting the right balance for your family and focusing on what you value.”
“This is where a CFP® like myself can really bring value by creating a financial plan that takes into account all these competing values and priorities. With the right strategy and guidance, you can keep these things in balance. You won’t have to feel you’re putting everything else you’re planning for on pause while you pay down this substantial debt.“
Money & Life