Mortgage ads aplenty
In recent weeks my eyes have been subjected to a plethora of advertisements on how I can pay off my 30 year mortgage in 10 years or less.
This one coming through on my Facebook timeline (Yes, I still use Facebook – Boomer right).
Pay off your mortgage in less than 10 years!
Pay off the mortgage in less than 10 years
Save over $200,000 in interest without having to adjust my lifestyle.
Sounds great – Sign me up.
Or how about this recent blog entry from Futurebound?
“Cut 20 years off your mortgage without increasing regular repayments”.
Amazing! What kind of witchcraft is this? I must know this secret sauce.
This is how they get people to sign up for their seminars, courses and even products. By making people believe there is a secret sauce. Something they are missing.
The secret to paying off your mortgage quickly
Well, let me break a little secret for you. There is no secret!
Just like there is no secret place for your short term savings other than cash, savings, or revolving credit/offset mortgage facilities, there is no secret to paying off your mortgage faster.
Once you have purchased a property and taken on a mortgage there are two ways you can pay it off faster.
1/. Reduce the time frame of the loan; and/or
2/. Increase your payments
Because reducing the timeframe actually increases your repayments, there is really only one way to pay your mortgage off faster. Increase your payments.
That is all. There is no giant secret or scientific formula!
If you, like me and many others, are only earning enough to cover your current 30 year mortgage and not much more, then you will not be able to pay off your mortgage in 10 years without selling an asset or earning more.
These companies that advertise the promise of shaving 20 plus years off your mortgage rely on you to have a bunch of spare income.
There is no amount of mortgage structuring that will help you pay off the mortgage 20 years sooner, let alone 5 years sooner. You need more money in order to achieve what the ads promise.
Going back to the linked article from Futurebound, let’s take a look at the ingredients to cutting 20 years off a mortgage without increasing regular repayments.
1/. Offsetting the mortgage
2/. Splitting your loans
3/. Paying extra repayments
Let’s test out the first two ingredients with a scenario. We will assume a $700,000 30 year mortgage. We will assume an average 30 year interest rate of 5% (rather than 5.5%) thanks to using the second ingredient of taking out mortgages across multiple terms to minimize risk. And we will assume we have $50,000 in our emergency fund fully offsetting the mortgage. How does this affect things?
These changes would shave up to almost 7 years off the mortgage. Basically paying a $650,000 mortgage at a 0.5% lower average rate means being able to save $486 a month extra towards the mortgage.
7 years is pretty good, but it is no where near 20.
Also there is no guarantee that hedging mortgage terms will result in a lower average mortgage rate. We used 0.5% lower but it could be the same, or even higher.
If we assume the mortgage rates with both strategies are the same, then we only save 4 years or so due to a lazy $50,000 lying around.
What if we have $100,000 of spare cash instead of $50,000? Then you could shave 8 years off your mortgage.
So basically you need interest rates to work in your favour and have a lot of spare money. Then maybe you could shave around 10 years or so.
Then the third ingredient to the secret sauce is paying extra repayments. But I thought the headline of the article stated “without increasing regular repayments? Why yes, yes it did. That my friends is just some cunning word craft. They say you can make extra payments either through higher regular repayments or through lump sum contributions. Slightly different wording but in effect it is all the same. You have to pay more towards your mortgage.
That is what will make up the extra 10 years or so required.
In the above example we would need another $1,300 a month to go towards the mortgage.
So $100,000 in spare cash and $15,600 a year above the minimum repayments (every year for 30 years) floating around to go towards the mortgage and you should be able to shave 20 years off a $700,000 mortgage at 5% interest rate.
It’s generally a good idea to have multiple mortgage loan terms, then you never run the risk of having all your loan need refixing at a bad time. But it is no guarantee of getting a better rate. It is just good risk minimization.
If you have spare money, then it is also a good idea to have a portion of your mortgage on offset or revolving credit. By not having to pay interest on that amount you can save some good coin. But this is no secret.
At the end of the day, to shave 20 years off your mortgage then you need to have a heck of a lot more extra money than is required. Then you can structure the loan so you can make the most of the spare money.
It is no rocket science. And there is no secret other than paying more money. Don’t be suckered into believing there is a secret.
Finally, never forget the opportunity cost of your decisions. Saving $200,000 or more sounds great, but if you put that money elsewhere you could also earn $200,000 (or even less or more) elsewhere. So in effect you aren’t exactly saving $200,000. Because if you don’t make the decision to put the money on the mortgage you may make the decision to put it productively to use somewhere else. Funny, how none of these companies mention that. That is because they have bias.
Final thoughts
These claims aren’t based to the few mentions I have made here. There are companies and ads everywhere regurgitating the same stuff.
No one is going to go far wrong by paying off the mortgage quickly, but let’s call a spade a spade. To do so you need to pay more money towards the mortgage. That is where the time and money savings come from.
Those involved in the property industry and are paid as such, love for you to buy houses and pay off mortgages, so that you have more equity for more houses. Those in the investment industry and are paid for shares held under management or for their recommendations love for you to use your spare money for shares instead. The answer for you is “it depends”. That is where you need to be careful of where you are getting your advice. Independence is a great place to start.
Everyone loves to think they have stumbled on something incredible that no one else knows about and that is what these companies prey on. But I have found that most secrets are extremely disappointing in the light of day.
The answer is usually very simple when it comes down to paying down the mortgage. Structure wisely, and pay down as much as you can whilst leaving enough money for the rest of your lifestyle and goals.
TLDR: Can’t shave 20 years off your mortgage? You need more money.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here