Ever since I bought my first house, I’ve always thought that it was best to pay my mortgage off as fast as I can. You can do this by paying as much as I can per week on mortgage payments.
Using a simple mortgage calculator, you can calculate how much you will save, in both money and the time it takes to pay off a mortgage, by increasing your payments only slightly.
Say you have a $400k mortgage ( I know, houses are expensive in New Zealand) and you extend the term to 30 years. The maximum term allowed in New Zealand. Say you get a good rate of 5%. Your weekly payment would be around $495. That’s not bad when you consider that the median national rent for a 3 bedroom house in New Zealand is $460.
But, consider that you will be paying it off for 30 years, the total you will pay for your $400k mortgage including interest and fees are $772k. That is close to double the initial cost of the mortgage! And, considering we are in a historically low-interest environment, it is possible that it will be much more than double if rates go up in the future.
What happens if you increase your payments?
If you start paying $500 per week rather than $495 per week, equivalent to skipping the odd coffee here and there, you save $14,000 of the final payment. And you will have paid off the house 1 year earlier.
Now push this even further, and the savings get even better. Move to 600 per week, and you will save $132,000, that is nearly one-third of your initial mortgage!!! And you will have paid off the house 10 years earlier.
This is the power of exponential growth, but in this case, the exponential growth is working against you. This means that it is working for the bank.
That is why I have taken it to the extreme! Currently, I am paying off the mortgage at $900 per week. Which is nearly double the current median rent in this country. But, I will have paid off the entire mortgage in under 10 years. Once our student loan has been paid off, we are likely to increase payments even further.
There are other benefits from paying off your mortgage early as well.
Your payments will end
One of the most obvious ones is that there are no more payments once it is paid off. Then you can live in your house for free, asides from insurance and property taxes. And you won’t be affected by the ever-increasing rent prices. If that’s not being financially independent, then I don’ know what is.
You can leverage your home
Once you have paid off your mortgage, your house will become equity that you can leverage with your bank for other investments like rental properties or stocks. Even though that is not in our plan at the moment, it is always an option.
Never deal with a landlord ever again.
Once you have your own home, you never have to deal with house inspections. As a student, I never liked inspections. The landlord going through every room in the house looking at your stuff and the state you are keeping the house in. I understand their purpose; they just seem like such an invasion of your privacy.
You can play “house”… if you want to
Unlike renting, when you own your own home, you can decorate how you like, hang whatever you want on the walls. And generally, do what you wish with your home. There is no way that you can do this in a rental.
If you want to live overseas for a while, you can consider swapping your house with another family around the world and live where they live. I have only just stumbled across these options, but it would be interesting. In a few years, we are hoping to do an extended year of travel. However, I don’t know that we will be staying in one place for a year for this to work.
Increase money for Investment.
This is the main goal I have. Once I eliminate the expense of paying for somewhere to sleep, and that is exactly what your house is, you will have more money to start investing in other things like stocks and shares, starting a business, or improving side hustles. Whatever you are looking to do.
Once we pay off the house, we will start spending the money that we would have paid on the mortgage; rather we will continue to pay that into some investment to increase our passive income to the point that we will not need to work anymore.
But there are downsides to paying your house off as fast as you can!
You have to remember that there are opportunity costs in putting money into your house rather than investing it in something else. What is the opportunity cost of that extra $5 per week that you put on the mortgage?
The opportunity cost could be missing out on one coffee a week. That’s not bad at all. And if it is, you need to pull your head in! That one coffee per week will save you $14,000 over the life of your mortgage.
Ok, so what if you were going to be very disciplined and save that 5 per week. Wouldn’t the exponential growth of that 5 per year be more than the $14k that you save? You can work this out using the future value function on excel. Or do the calculation on a piece of paper. Either way that $5 per week will accumulate to be roughly $10k after 30 years at 5%. So you still save $4k more if you put it on the mortgage.
But what if my investment rate is higher?
To match what you would save on your mortgage, you would need an investment return rate of around 7% after taxes. Your investment would need to be paying around 10% per year to match your mortgage savings.
10% isn’t too hard to achieve, my investments in index funds and harmony etc. are above 10%. The thing is that you have to be disciplined to pay that $5 into an investment account every week for 30 years. And when you are not obligated to do this, people generally don’t. With a mortgage, once you set your payment rate, you have to stick to it. Otherwise, the bank will come knocking.
Either way, when you go to refinance your mortgage, the bank lets you know that you could decrease your payments by increasing your term. Many people may think this is a great idea as you will have more money right now to spend. Remember that this is in the banks best interest. This will allow the bank to use the power of exponential growth.
No wonder why they keep posting record profits year after year!
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