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Tuesday, 9 May 2017

3 ways to shorten your mortgage right now

Buying a house is exciting. Moving in is exhausting and exciting. Decorating is frustrating and exciting. Renovating is terrifying and exciting. Realising you can walk naked around your house is liberating and exci-.. let's leave that one.

You know what's not exciting, staring down that 30 year ball and chain of your mortgage and the insane amount of interest your are going to pay. Here's three ways to knock years and tens of thousands off your mortgage.


But before we start...

Firstly, let's look at the word mortgage, from a couple of latin words it's roughly translates to Death Pledge. Okay it might not be as dramatic as that, but when you took out a mortgage, you took out a 'til death do us part' pledge with your bank. On a 30 year $300,000 loan with a 4% interest rate, you have just promised to not only pay back that $300,000, but another $215,000 in interest.

For the sake of this article I'm going to assume you are already paying your mortgage weekly, rather than monthly. If not, let me break it down really quickly.

12 monthly payments of $1,400 equals $16,800 a year.

If you make fortnightly payments you need to put in half that each fortnight. Except that are 26 fortnights in a year, which means you end up making an extra months worth of repayments. 26 fortnightly payments of $700 equals $18,200 putting you ahead $1,400.

If you make weekly payments you need to put in a quarter of your monthly payment each week. There are 52 weeks in a year, which works out the same as fortnightly payments, but because you sneak the money in earlier you save a little bit more interest over 30 years it really adds up!

The average earning for an Australian in 2016 $78,000. Your mortgage is an agreement to pay six and a half years of your wages to the bank. Egads! Sure $300,000 is for the house, and only $215,000 is the banks profit but still, just imagine working six and a half years and not seeing a cent of it. Every extra dollar you throw towards your mortgage reduces the length of the mortgage, and the amount you pay to the banks so start now!

Sacrifice something small

No need to start sketching up a pentagram, you can knock years off your mortgage with small lifestyle sacrifices and no blood rites. Ditch your $25 a week gym membership and head outside into the sunshine. Not only will you soak up some extra vitamin D, putting that $25 into a mortgage will knock almost 4 years and more than $30,000 off your mortgage.

Call your bank

Yes, I know, it's uncomfortable and awkward, just do it. Check out the current interest rate market and call your bank every three to six months. Let them know that you've been looking online and can see that xyz bank is offering significantly lower rates and you're considering switching. Most banks empower their staff to drop your interest rate on the spot. A drop of 0.05% can knock $2 a week off your repayments. Keep paying at the higher rate and you can knock 4 months and close to $3,000 of your death pledge. All for an uncomfortable five minute phone call. If I told you calling your senile racist auntie once every few months would net you $3,000 would you do it?

Hustle with your house

See, the thing about houses is that people like to live in them. I assume that's why you bought yours anyway. If it happens to be a bit bigger than you and yours need perhaps you have a junk room, or a big back yard that you could put to use?

Renting out your junk room to a lodger could net you $100 a week, $85,000 off your mortgage, and almost 11 years back.

Don't want a stranger underfoot all the time? Rent the room on Airbnb for weekends, even with a few vacant weekends you should be able to pull in an average $30 a week, $35,000 and 4 and a half years.

Don't like people? Are you pro-dog? Pet sitters have been known to charge up to $35 a night. You'll mostly have visitors over weekends, but on average you could be looking at $50+ a week, $53,000 and six years. 

Don't like animals? Consider renting out your junk room as storage space for strangers with too much money. Spacer.com works like Airbnb, but instead of people, you rent out your space to stuff. According to their website you could pull down $4,000 a year! That's $75 a week and knocks $71,000 and 9 years off your mortgage. For putting peoples stuff in a corner.

Conclusion

Look at it this way, increasing your payments by a measly $4 (1%) knocks 8 months off your mortgage and saves over $5,000. Any of the strategies above is far better than that and putting all of them together could knock $100,000 and twelve years off your mortgage. Okay they're a little uncomfortable and take a little leg work, but can you really pass up $100,000?

Not paying a mortgage and want to save that money? Check out my calculator to see what your new savings / income stream could be work after ten years.


6 comments:

  1. great ideas, don't forget the tax implications of using your home as income/business though! Including the income on your tax returns is a must and you can also claim some deductions, so it won't all be wasted away in tax. Also probably the biggest part is that if you profit from your primary residence then you lose out on the full capital gain exemption when you do (if you do) ever sell. Handy Tax Office page on the topic -
    https://www.ato.gov.au/General/property/your-home/renting-out-part-or-all-of-your-home/

    You might have been aware of the tax side (I'm no tax expert though!) - but just thought I'd mention it in case you didn't :)

    Mrs DDU

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    Replies
    1. Thanks for the info! I did a bit of pet sitting (until a greyhound ate my doorframe...) and when I put through my last tax return the agent said to leave it off because it was such a small amount, and it wasn't going to lead to any worthwhile deductions.

      Definitely worth mentioning, but it's one for the experts though, not me! :)

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    2. That's interesting about the tax agent suggesting it be left off, I do think there is a "hobby" income threshold for certain activities, and petsitting could easily fall into the "hobby" category. Airbnb/renting a room or using it for someone elses storage might not be so easy to put down to a hobby though :p

      Delete
    3. We were definitely sneaking in under 'hobby' - we have a pretty small house and yard so we only had a couple of visitors. Didn't bring in much cash at all, I mostly did it for puppy snuggles

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  2. I only have one small problem with calling my bank for a better rate... now with less than $45k left on our mortgage no other banks are interested in giving us a new loan. Neither is our own bank! I've started dumping our extra savings into RateSetter to increase our rate of return instead, even though paying off our mortgage would give me incredible peace of mind.

    ReplyDelete
    Replies
    1. I'm a huge advocate for investing over paying off a mortgage - especially with the rates as low as they are.

      I'd say it's a shame you can't get a better deal, but with only $45k left to pay you should be celebrating! So close to the end :)

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