Taking thirty years to pay off your home is the old fashioned way of doing it. Nobody needs to take that long and there’s a very simple way that anyone at any point can start to pay their home off faster.
Let’s have a look at how much it actually costs to own a property and take thirty years to pay it off. It might give you a bit of motivation and get you fired up about getting that mortgage down fast.
Let’s take a four hundred and fifty thousand (450,000) dollar mortgage on a property and take 30 years to pay it off, with an average interest rate of about 6.25% over those 30 years.
It would cost you in total, to pay the house off and pay the interest: $997,461 to pay that property off over the thirty years of the loan.
It would cost you $547,462 in interest on that property plus the principal amount borrowed. That’s over 120% on top of the original loan, just in interest. Pretty crazy, right?
It’s not all terrible news! If we just understand how to do things a little bit more efficiently than the average person, we could be paying homes off fast.
Tip #1 – Make fortnightly payments
The first tip I want to give you is pay your payments for your mortgage fortnightly rather than a monthly payment. Most people are on monthly. If you pay your payments fortnightly, it ends up calculating that we make an extra payment each year, because of the fortnightly calculations. That alone helps you pay off your home far sooner and far quicker.
If you do fortnightly payments on this mortgage, you will save five years off your mortgage. Now you go from 30 years to 25 years while saving yourself $121,000 in interest. That’s more money in your pocket, not in someone else’s pocket! That’s an awesome guaranteed saving which I think is a great strategy and an easy one to go and apply immediately.
Tip #2- Use an offset account
Make sure you have an offset account set up on your mortgage. You need all of your money either making you money, or saving you money.
Let’s have a look at what happens normally. Someone will have a stand alone savings account. But it’s not really a savings account, it’s a “losings account” because of the way it’s structured. Your wage goes into your savings account, then you make the payments for your mortgage from that savings account.
Additionally, interest that you make on the money in your savings account is very low, on average about 1.5%. Last year, inflation was about 2.5%, so technically money sitting in your savings account has lost 1% while sitting there, hence, the term “losing account”. Your cash went down not up!
With your offset account, every single cent you have spare should be in this account. If you have $10,000 sitting in your offset account instead of your savings account, instead of losing you 1%, it would have saved you 6.25%. Guaranteed savings, tax free as it’s not an earned income. Interest is calculated daily so every day you move money into your offset account, will have a compounding effect over the years and help you pay your home off even faster!
Tip #3- Use your positive cashflow property wisely
The third tip to help you pay your home off fast is to make some extra payments. Look at where your money is and make sure you’re getting the most out of that money. A lot of people have some equity in their home that they could buy an investment property with. If that investment property is positive cash flow after tax, it will give you money to then make extra payments back into your mortgage.
An extra $500 payment can save you 16 years and $206,000 in interest!
If you do have some equity in your place of residence, your home, to be buying more investment properties, you can begin to accumulate multiple properties that are positive cash flow after tax. Thus enabling you to put more money back in your mortgage at a faster rate.
Simply, a five hundred dollar ($500) payment regularly to your mortgage can save you sixteen years. Imagine the compounding effect of multiple $500 extra payments on your mortgage.
If you look at the bigger picture a $1000 repayment extra to your mortgage each fortnight would save you twenty years off the mortgage above, that’s $275,000 in saved interest!
Use these three quick tips on how to make sure you pay your home off fast and actually get there quickly.
*Bonus tip – Get rid of bad debt
Sometimes we’ve got a credit card which is bad debt and not efficient in any way. If we can get rid of that debt, the extra payments we were making on it are forwarded to the mortgage. One of the wisest strategies to get ahead as a property investor is get rid of your debts fast. I’m not a big fan of having massive non-income producing debt, I call that “bad debt investment”. Investments that are making you money, investments that are getting you an income, that’s the only debt you want.
That’s debt that leverages some capital growth and some cash-flow. Unfortunately the home that you live in is typically non-income generating so in the terms set out above is bad debt. It’s not tax deductible either, so we need to reduce that debt quickly so we can be wealthier in the future. As a property investor your aim for retirement should be to have limited debt and all of your assets delivering income!
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