Day 19: How to Pay Off Your Mortgage in Record Time

When we bought our house a couple of years ago, we already had credit card debt, two car loans and a margin loan (shares investment loan). We estimated that it would take 10 years to pay off the mortgage and other debts. However, with aggressive lifestyle adjustments we have been doing in the past 1.5 years, we found out recently that we could pay ALL of our debts off within the next 2-3  years.

I’m not going to preach another ‘spend less than you earn’ sermon (I know that you know) but here’s a few of “mind hacks” that are working for us:

1. Don’t listen to real estate agents or mortgage brokers about how much you can afford.

When we bought out house, the market was booming and most auctions we attended would end up 35% (or more) higher than the reserved price. It was ridiculous and borderline misleading.

One mortgage broker told me that if I found a house I like, it pays to bid more since $10,000 extra only translates to $15/week extra payment . I found the advice reckless. First of all, it’s not his money, so he didn’t care. Second, $15/week will add up to $19,500 after 25 years. Imagine if you get emotional during the bid war and end up paying $50,000 more than your budgeted price. Trouble?

2. Never use the maximum borrowing amount allowed by the bank.

A good rule of thumb is to never borrow more than twice your gross annual income (or combined income if married or de facto). This is a conservative formula and is probably hard to apply in some areas. In that case, you can either:

a. Save more money for the deposit

b. Rent in the area you wish to live and buy an investment property in the area you can afford.

c. Move to a cheaper area altogether.

You can still borrow slightly higher than twice your annual income and live comfortably, but you won’t be able to anticipate too many interest rate rises or emergency expenses.  Mortgage stress kicks in when your repayment is more than 30% of your net income. If the interest rate is 7.5%, that means you will be in trouble if you borrow four times your net income (30%/7.5% = 4).

We borrowed only less than half of the maximum borrowing amount or about twice our combined gross annual income at that time. Since then, we’ve had pay rises and scaled back our expenses significantly which results in exponential growth of savings channeled to our mortgage account.

3. Putting money in mortgage account vs. online high interest account.

We choose the first one. Why? First, mortgage rate is always higher than the interest rate in online savings account. Second, the interest saved in mortgage account, while invisible, will not be taxed. Your savings account interest will be.

Before you move your money around, be warned! You should only do this if you have a flexible mortgage account which allows you to withdraw any excess payment any time free of charge. You definitely don’t want to lock your money away or be penalised when you make a withdrawal.

4. Find out your “mortgage payoff factor”.

Okay, that’s a term I invented after reading a great mind hack idea in a savings forum. To find out your mortgage payoff factor, go to lump sum repayment calculator here and enter your numbers. Divide the interest saved amount by the lump sum amount then you find your mortgage factor.

For example in our case:

Loan amount: $240,000

Interest rate: 7%

Loan term: 25 years

Lump sum amount: $1000

Lump sum payment made after: 2 years

Time saved: 3 months

Interest saved: $3,951.70

Mortgage payoff factor: 3.95 ($3,951.70/$1,000)

So, what to do with that number then? Well, here’s the fun part.

Weld that number into your brain.

Every time you go out and think about buying an item, multiply the item price to that number. If you are tempted to buy a $100 dress, think that you can either waste $100 or put that money into your mortgage and save $395 in interest! If this doesn’t put you off from spending, I don’t know what else could.

Feel free to apply that to all non-essential purchases… or any purchase, really.

Please note that this practice only works 100% in Australia, disregarding property tax, tax rebate and any policy surrounding mortgage in your home country.

However, math principle works the same everywhere. So, give it a go.

17 Responses to “Day 19: How to Pay Off Your Mortgage in Record Time”
  1. We put a down payment that was large enough so that we didn’t have to pay pmi insurance. We created a spreadsheet to determine that amount of time each additional payment would make to the loan duration. And we chose to live beneath our means by picking a house that was cheaper than what we could afford at the time (we built instead of purchasing an existing home).

    It took us a little over 10 years to pay off all debt.

    Good to see you are in the same pay off your house early camp that we were in… 😉

    • Bytta says:

      Hi Don,
      Good on you! We’re on our way too.
      Talking about mortgage insurance, we actually had to pay it because our down payment was less than 20%. I stressed about it in the first year and wished we had saved more. Lucky for us, it turned out to be the right decision because the house increased by $70k in value within 2 years. Had we saved and waited, we would’ve had to pay a lot more. Yes, it was mostly luck. Next time, we’ll be wiser.
      Thanks for dropping by.

  2. Like you we bought half the house that we could “afford” to. In retrospect (admittedly the wife does not agree) I would have bought one forth the house. Paid it off, saved some cash and rolled it all into a larger house. When you add up all the interest, it is a killer to you long-term financial goals.

  3. I really like your idea of a mortgage payoff factor. It’s a great way to discourage unnecessary expenses.

    Good luck on paying off your mortgage early, although it doesn’t sound like you need it!

    • Bytta says:

      Why, David?
      There’s a reason why I need to build deterrent and mental barrier to spending; I’m easily swayed. Don’t say stuff that would make me wanna spend 🙂

      Yes, i like the mortgage payoff factor. It magnifies the actual cost of spending. I appreciate that you mentioned that because the whole post is actually about that. The other points are just common sense (which are commonly mentioned by others).

  4. I have to ask. You mention a mortgage account being able to withdraw access payments anytime free of charge? I’m not a mortgage expert but I’m definitely not familiar with these types of mortgages. I”m guessing its an Australian thing. In the US, we don’t have that luxury and I see too many people in this economy that have paid down their mortgage at the risk of any type of savings or emergency fund. It’s a dangerous trap.

    • Bytta says:

      Hi there,
      Yes, as I said there, some of the strategies only work in Australia. Most of our basic no-frill loan products offer free withdrawal to excess payment… which can be good or bad. Flexibility is important, but it can be our undoing too. This strategy is commonly used by Australian mortgage-owners (not home-owners, mind you ;)).
      I also notice that you have tax rebate on mortgage interest on residential home, we don’t. Here, it can only be tax-deductible if it’s investment property. So, there you go.
      Thanks for dropping by.

  5. Evan says:

    “One mortgage broker told me that if I found a house I like, it pays to bid more since $10,000 extra only translates to $15/week extra payment . I found the advice reckless.”

    Does your mortgage broker also act as a real estate agent over there?

    • Bytta says:

      Hi Evan,
      Most of them don’t do that, thank goodness. However, they are in the business of making buyers borrow as much money as they can (despite the “noble mission” they spruik). Huge conflict of interest, don’t you think?
      Thanks for stopping by.

  6. I like your mortgage factor too. Good luck in paying it off soon!

  7. Good job thinking about how your spending could translate into paying down some important principle!

    It’s always a good time to buy or sell according to your mortgage real estate broker. Always a good time to refi too. So annoying their pitch!

    Best, Sam

  8. BTW, Bytta, any way you can install a tweetmeme button so I can help promote?

    • Bytta says:

      Ok, correct me if I’m wrong, the plugin is only available for WordPress blog with your own hosting, right?
      I’m organising that this month. Thanks for the offer. I’ll keep you updated.
      Yeah, not a big fan of real estate agents. The problem here is the property market is going into bubble again soon. People here can’t get enough of property. Oh, with the AUD flying high and US property market down, there’s a mini trend of Aussie property investors invading US market. Tempting…

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