Blog by Cam
So you’ve taken the leap and purchased your new home – how exciting! Trish and I first bought our home at the age of 25 with a massive mortgage (in the day of 2002), it was very nerve-wracking to say the least! The home mortgage can be very draining and daunting when you first take it on.
We aimed for a 20% deposit to avoid paying out mortgage insurance (that’s insurance for the bank not us!). We also needed to allow for stamp duty and other costs, which at that time was around 5.5%. Inevitably, we needed 25% to avoid the $3k mortgage insurance.
As we had married less than 12 months before, our wedding took a large chunk of our savings. This meant that we were a little short of our 25% goal. Thankfully we were able to find the extra money needed by borrowing $20k from some wonderful family members with the agreement that we would pay it back with interest within 12 months at the going interest rate with a $1K bonus on completion. This saved us the extra $2k we would have spent on mortgage insurance and our family also benefited from their loan to us. We love a deal when everyone wins!
We made paying our mortgage off our priority and did so within 7 years (in that time we’d also purchased a small investment property and had three children). Here are some simple strategies that may help you to achieve the same results:
1. Shop Around for the Best Mortgage Deal
One of the biggest mistakes that new home buyers can make is borrowing from the “Big 4” banks.
The big banks are safer, right?! Absolutely not! You are borrowing money from them, if they go out of business someone will still chase you for money. It’s a different story if you have money sitting in the bank as you have something to lose, but if you have a home loan you don’t have to worry so much.
We eventually learned to shop around for the best deal. You can do this too by using online comparison sites such as www.canstar.com.au/compare/home-loans. Compare what you will pay over the next three years for your top 3-5 borrowers on your list that meet your requirements. Also: avoid honeymoon offers, it is a huge undertaking to swap your mortgage over every 12 months and in the long term, you will lose.
Trish and I looked at the smaller lenders for our investment loans. Since switching over to them we have saved $17k interest over three years in the early days, simply by doing a rate comparison against the big 4 banks. Yes, we already had the 1% discount from them too.
Every few years I do a rate comparison check and have found it definitely worth shopping around. One phone call can literally save you thousands of dollars every year. If you work that out on an hourly rate you will find it’s the best time you can spend.We also do this with power bills!
2. Money buckets – Sending All Your Income Directly to your Mortgage.
I’m a little strange and love working out the interest saved by doing this per day! You need to have either a redraw or offset facility to do this. Then have your seperate spending buckets (bank accounts automatically draw down on this at a pre-determined amount and frequency).
Getpocketbook.com for example allows you to automatically track your spending. However, some people work better with a hard limit of a bank account that when the money is gone it is gone. Or even cash in an envelope to ensure they don’t go over their pre-defined limit. Whatever you method you need to make sure you need to have a family meeting to get buy in and stick to your agreed plan/goal. Adjustments along the way are fine as long as the plan is updated too :).
3. Delayed Gratification!
As new home owners with a mortgage, it never felt right to us to buy that new flat screen TV (they were $10k at the time!) in the mid 2000s before paying off our personal debt. We repainted our 1972 house ourselves and did minor updates, however we delayed major renovations and even the purchase of new curtains, new kitchen and bathroom updates until we paid off our mortgage. Most of our friends did the complete opposite and bought the latest and greatest in technology and furnishings and renovated immediately after purchase. Most couldn’t understand why we chose to live with our dated house and second hand furniture. Secretly we were hammering down our mortgage before major renovations. We are very grateful that we ran our own race and stuck with our plan!
Simply put: If you want a different outcome (FIRE), you need a different approach.
Our friends’ mentality seemed to be that the mortgage was going to be there for +25 years so why wait so long? “Live for the now” we were told. Instead, we drove old cars, made our own lunch, didn’t buy coffee every day and bought secondhand furniture and baby goods (Trish later ran a business doing that) and even shopped for some clothing and wetsuits (we are beach lovers) at op shops.
We had a goal to pay off our mortgage in 5 years (aged 30), but didn’t want to tell anyone. It took 18 months longer than planned as we also bought an investment property and added to our share portfolio. The only downside was everyone knew when we had paid off our mortgage when our newly purchased curtains went up!
Slow and boring
We took a relatively conservative and boring approach by simply paying down personal debt before investing too much. There are more ‘agressive’ approaches by leveraging earlier against your property to buy shares with a growing dividend stream which supports paying off the debt even faster. It’s another topic called debt recycling. However the proven method of paying down personal debt first was our strategy.
By following the above steps we paid off our home loan in 7 years. It was a great feeling once we got there!