Money
Floor the accelerator and pay off your mortgage in the next 7 years
Think paying off your mortgage before you retire is a pipe-dream? It’s more achievable than you think thanks to Nicole Pedersen-McKinnon’s proven strategies.
By Nicole Pedersen-McKinnon
In a younger life, I was motivated like a madwoman to repay my first mortgage within 7 years.
You see, I had set myself the crazy goal of being debt-free before I had kids… and the clock was ticking!
Fortunately, in a life-changing side-benefit to being a personal finance columnist and commentator, I had also come to understand the maths of a mortgage.
And when my son was born – almost exactly 7 years later – I had indeed fully discharged my debt.
Today, with a fresh mortgage I am once more racing the clock to pay it off in full – but this time my target is a debt-free retirement.
It’s possible you’re in this race too?
So, let me share the 7 strategies I used to pay off my first home in just 7 years that I’m going to be utilising again. These fast-track, all-in, proven techniques will get both you and I to mortgage-freedom precisely when we need it.
Step 1: Get the red-hot rate
If you haven’t yet quite clocked the difference a rate makes to what you pay each month and ultimately overall, let me give you an example. I’ll base it on a $400,000 home loan in the hopes that yours is that low, too.
Let’s say you’re on a big bank rate of 7%, the total interest you will pay over 25 years is $448,148.
But if you are able to refinance or renegotiate a rate of 5% (which will hopefully soon be quite common), your interest bill falls by $146,639, to $301,509.
Your minimum monthly repayments have also dropped from $2,827 to $2,338.
Just from that one move. But here’s how to take those savings stratospheric…
Step 2: Just pay the same to save
So you’ve moved your mortgage or managed to talk your way into a discount.
That’s great… because it gives you a great opportunity to pay extra for no more money than you’re used to paying.
If you “up stumps, but still stump up” the previous amount of your repayment, you add another $96,073 to your interest saving and slash your overall bank bill to just $205,436.
Did you miss that you’ve just saved way more than $200,000? You also shaved 7 years off your time in debt.
And yes, you can live without that $489 a month because, reminder, you live without it already.
Which brings me to…
Step 3: Use the debt-busting secret weapon
It’s very possible you don’t realise the pure mortgage-repaying power of the humble offset account. Even though it was invented in Australia, most Aussies have no idea of this quiet little achiever’s potential to save them a fortune.
If you have a mortgage, consider holding every dollar you have to your name in an appropriately named offset account – or offset accounts. If it’s important to you to keep your money for different purposes separate, you can often have up to 10.
But let me backup and clarify what an offset account actually does.
Money you hold in an offset account is simply netted off the attached home loan balance. So if you owe $100,000 but have $10,000 in an offset account, you only pay interest on $90,000.
When you are on a mortgage repayment mission, every single dollar you can find should go into your offset account so it can be saving you loan interest.
Your rainy day or emergency money. Savings for holidays. Savings for renovations. Bank of mum and dad savings…
Say you can sit $30,000 at all times against that typical $400,000 loan at your new 5% interest rate. You will save almost $66,000 and 2.5 years.
For really doing nothing.
As a side note, it’s far safer and more accessible to house money in an offset account than directly in your mortgage. That way, rather than relying on being able to redraw from the mortgage, you are guaranteed access to your money. And you get the identical mathematical benefit.
Step 4: Spend the bank’s money
I think of this one as the offset-on-steroids strategy. What you do is cleverly add a credit card.
The very straightforward technique is to get your salary (or salaries) paid directly into an offset account each month.
Then you use your credit card for all your expenses for the month.
Only when your credit card bill is due, do you shift the money out of your offset account and onto your credit card.
Key, of course, is to not incur a cent of credit card interest. You need to clear it in full within the interest-free period (typically 55 days, but check the fineprint).
A second caveat is to only use this approach if you are really disciplined with your spending. It won’t work if you use your credit card to spend more than you earn. Or even if you end up spending more than you usually would.
Step 5: Round up your repayment
Now we’re getting into paying extra… but think of it as paying extra ‘lite’.
This and the next step are almost ways to trick yourself into contributing just a smidge more. But while the extra may be small, it makes a significant difference.
Remember, in our $400,000 model above, a 5% mortgage requires a monthly repayment of $2,338.
But let’s say you instead round it up by $62 to pay $2400 each month.
Just by doing that, you’ll slash $17,167 off your overall loan interest and get out of debt a year early.
And, roughly related…
Step 6: Make your repayments fortnightly
This seemingly simple change only works if you halve your monthly repayments rather than asking your bank to calculate a new fortnightly one.
And it works because of our Gregorian calendar – no kidding!
Think about it… although there are 12 months in a year there are more than double the amount of fortnights – not 24, but 26.
So by making half your required monthly payments fortnightly, you’ll come out ahead each and every year.
The savings from repaying $1,169 fortnightly versus $2,338 monthly?
It’s another $48,000 and debt freedom 3.5 years early.
Finally…
Step 7: Straight up pay extra
While it’s not nearly as appealing as using the expert and inexpensive strategies mentioned above to bank massive savings, you could always just make extra repayments.
It’s incredibly effective.
Because, fundamentally, every extra dollar you repay is a dollar on which you will never again pay interest.
On a $400,000, 5% mortgage:
- Just $100 a month extra saves $27,000 in interest and 2 years
- $200 a month saves $49,000 and nearly 3 years
- And $500 extra a month saves $98,000 and shortens your loan term by more than 6 years.
What do you think? Could you be mortgage-free easier and in just 7 years? I’ll race you.
Before you go, there’s actually a flip-side to paying off your mortgage before you retire. Here’s Nicole again with all the reasons why you might not want to...
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.
Advice given in this article is general in nature and does not take into account your personal circumstances. It is not intended to influence readers' decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Feature image: iStock/FluxFactory
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