For most families, making extra payments on their mortgage is the most effective way they can save money. Most people, however, don't realise just how much they can save by making extra payments, or by arranging their mortgage differently.
Competition between banks and other mortgage providers has given us better home loan options and improvements are happening all the time. Most mortgages now offer a redraw facility, allowing you to make extra payments, then to withdraw the extra money if you need it. This allows you to have your cake and eat it too, making extra payments when you like, yet still having access to the money.
There is more to saving money on your mortgage than just making extra payments when you have a few dollars to spare. This book will show you several ways to save on your mortgage, some of which cost you nothing. I will show you how to work out for yourself the cheapest mortgage option for your situation. I will show you how to calculate how much you will save by fast-tracking your mortgage. For the computer-minded, there are instructions for setting up your own mortgage calculation spreadsheet. The chapter on finding the extra gives heaps of ways to save the extra money to pay off your mortgage.
But even better than this, I will show you how to use the thousands of dollars you save to start your own retirement plan and retire wealthy.
The basis of the plan is to put everything you possibly can into paying off your mortgage super fast, then to use the money you were spending on your mortgage payments to build up a range of safe investments to fund your retirement. It sounds simple because it is simple, but it works. Barring major disasters like employment redundancy, family breakups or family business failures, it works every time. And if you do have a major disaster, the extra equity you have in your home, and the money you have saved, will help you to get back on your feet more quickly.
You can vary this plan a little if you want to. You may want to move to a larger house and pay off another mortgage before you start to save. This is fine. The method will still work, provided you follow the overall plan.
Here are three example families to show you how well this works.
When they have finished paying off the mortgage, they spend their $707 a month on holidays and eating out. They also take out a loan to buy a fast sports car and a boat that they use twice a year. They retire after another 15 years (at age 65) with an old sports car, an old boat (now only used once a year) and a government pension.
The extra Family C managed to save over the years has netted them over $600 000 more than Family B and $800 000 more than Family A. Remember this is using a fairly modest 6 per cent return. If they can manage return of 8 per cent over this time, the resulting retirement amount is $246 000 for Family B and a whacking $1 157 000 for Family C. That's over $900 000 more than Family B, and over a million dollars more than Family A.
Family C put in the extra $300 per month of course, so they may have done without a few things that Families A and B had, but this book will show you ways of raising the extra without ever missing it. The extra does not all need to be cash, either. We will cover ways to pay your mortgage faster without making extra cash payments.
Inflation will reduce the value of the extra money that Family C has at retirement, but it won't reduce it to nothing. It will still be worth a lot more than the retirement benefit for Family B. You can compensate for inflation by increasing the extra amount that you pay towards your mortgage payment and your investments over the years as your income increases. At the current rate of inflation of around 2-3%, your money will halve in purchasing power over around thirty years. If inflation returns to higher levels, then interest rates will probably go up too, so investment returns will be higher. Inflation cannot be used as an excuse not to save, but you do need to ensure that the after-tax return on your savings and investments is higher than the inflation rate.
WHAT WE WILL COVER
I have used a mortgage rate of 7 per cent on a loan of $100 000 over 25 years for the example mortgage in this book. The method works regardless of the prevailing mortgage rate or the amount borrowed. I will show you how to do your own calculations for your rate and amount, and I have included tables for a range of interest rates at the back of this book for people who hate maths. You do not, however, have to do a single calculation or look up any of the tables to fast-track your mortgage. Provided you follow the guidelines, the method will work for you.
I have also assumed you are paid fortnightly for income and money management calculations, and that you pay your mortgage monthly. If your payment interval differs from this, you can easily convert the values. One month is equivalent to 2.17 fortnights or 4.33 weeks. If you want to use the easier conversion of one month to two fortnights or four weeks, this is quite okay. The difference will be small. I have called your normal day to day bank account that you access with a card at an Auto Teller Machine (ATM) a keycard account, and the term bank includes any institution that offers home loans.
As you read through this book, keep in mind our basic plan. You pay off your mortgage as fast as you possibly can, then use the money you were paying off your mortgage, including any extra, to build up your retirement savings. There may be faster ways to get rich, but this way never fails.
Be realistic about mortgage pay-off times. To pay off our example $100,000 mortgage in three years, you would need to put in an extra $2373 per month above the normal $707 per month mortgage payment. That's nearly $28 500 per year extra. You may be able to manage this if you have two decent incomes, but for the average single income family with small children, this is totally out of the question. If you plan for ten years, you would need an extra $454 per month, which is much more achievable. For 15 years, the extra needed is only $192 per month. Even if you aim for fifteen years, you will still be saving over $50 000 in interest over the life of the loan.
Houses cost a lot of money compared to wages because houses cost a lot to build in materials and labour. Borrowing a large sum of money allows you to buy a home when you are young and setting out. If there were no home loans available you would spend years living in rented accommodation, with parents or parents-in-law, or even in a shed, while you saved the money to buy a home. Keep this in mind when you fast-track your mortgage. You will not pay it off by next year, but you can pay it off more quickly and save heaps of interest if you follow the guidelines in this book. The amount you owe will initially seem very large, but no one is asking you to pay it all back right now. Always think in terms of the money you are saving and the amount you have managed to pay off already, not the frighteningly vast sum you still owe.
There are some calculations in this book. They are all fully explained. If you don't like maths, all calculations are optional. Every single one of them. They are there for people like me who think in maths rather than words and who want to know how to do their own mortgage calculations and how to set up their own computer spreadsheets. There are also tables for people who prefer to look up tables rather than working things out for themselves. At the end of the book is a section on spreadsheet basics and full instructions for writing your own mortgage spreadsheet using Excel. Throughout the book I have included spreadsheet tips for setting up some of the tables yourself. These are for experienced spreadsheet users. There is also a summary list of mortgage equations for people who want to work out the values on a calculator. You will need a scientific or financial calculator for some of them.
If you would like a mortgage spreadsheet, but don't want to write your own, you can download one from my homepage. Here you will also find a current list of mortgage websites and you can download all the spreadsheets and tables from this book. The address is
I created my first mortgage spreadsheet when we bought our first home computer in 1986. When I realised the effect of extra payments on reducing our loan balance I started paying off our mortgage as rapidly as I could. I have never looked back. We have paid off loans for the land adjoining ours to extend our garden, and for a weekend property in the south-west of Western Australia. As well as our own home with large garden and our holiday home we now have three rental properties and an ever-increasing portfolio of shares. We have done this on a single income.
I wrote this book for everyone with a mortgage and everyone setting out to buy their first home. I will show you how easy it is to build up your family's assets and retire wealthy. It worked for me, and it will work for you.