Your Invitation To
Pay Off Your Mortgage - Quickly!
Did you
know that last year DIY stores sold thousands of drills
to people who didn't want them!
Think about the
truth of the above statement. What those customers really wanted was a hole! The same is true for your
mortgage. You didn't want that,
either. What you wanted was a house - but to get a
house, you first had to get a mortgage. If you're like
most people, you hate your mortgage, and you'd love to
get rid of this 25 year millstone around your neck just
as soon as possible!
So
you've taken the leap and decided to buy a home. After
signing a mountain of paperwork, you are now the proud
owner of your own residence. Thirty days later, when the
first mortgage payment becomes due, you are hit by the
reality of what you have done. You have taken on 25
years' worth of massive payments in an economy that
makes no promises about long-term job stability.
Let’s call a spade a spade! A mortgage is one of life's
necessary evils. You probably can't get onto the home
ownership ladder without one, but it's likely to be the
biggest debt you'll ever have and a massive amount of
your time, energy and money will be dedicated to paying
it off.
It
makes sense to get rid of your mortgage as quickly as
possible. Doesn’t it? Well, let’s deal with that one
right up front, just in case you have any doubts or have
bought into some of the stuff going around about how
great it is to keep your mortgage going.
How
much will your mortgage really cost you?
Imagine
for a moment that you’ve just bought your first house.
The asking price was £130,000 (ok, it’s a little out in
the sticks!). You negotiated hard and got your offer
accepted at £120,000. You are understandably over the
moon about this and pretty proud about telling everyone
what a great deal you got.
You’ve also prepared well and you’ve managed to save a
£20,000 deposit so you only need a mortgage of £100,000.
You looked around and got the best deal you could find
at the time. So you are all set with your new home and
25 year repayment based mortgage loan.
This
is where the “fun” starts because over the 25 year life
of this mortgage interest rates will fluctuate. We are
at historically low interest rate levels now but it
would be unwise to assume they’ll always stay down here
(remember 15%?). So let’s say that over the life of this
mortgage you will pay an average rate of 7% interest,
which is still on the low side.
Let's look at a simple example.
Do
you know how much a £100,000 mortgage over 25 years,
repaid at an average rate of interest of 7% (over the
life of the mortgage) will really cost you?
A
whopping £215,000!
What
that means is that you’ll end up paying for your house
and the house next door, then some more on top of that
as well.
But
wait! Even that’s not the end of the story.
If
you are earning £30,000 per year do you know how much
you will have to earn in AFTER TAX MONEY to pay off this
mortgage?
An even more whopping
£294,000!
You
might as well have bought the street!
Because
the true cost of this mortgage to you – is just about
every penny you will earn from every working day of your
life for the next 10 years!
OK –
Have I made my point? Well there is good news. It
doesn't have to be this way.
So
the first and most
obvious reason to pay off your mortgage as soon as
possible is that it will save you tens of thousands of
pounds in interest payments.
But
this isn't the only reason. Here are several more
reasons why you should kill your mortgage:
·
You want the peace of mind that comes from owning
your own home and being 100% debt-free.
·
With a lower monthly expenditure requirement, you
are not so vulnerable to economic downturns. If you lose
your job you can afford to take a job that pays less
without any concerns about losing your home.
·
You want to retire early. With no mortgage
payment, you can save up for retirement faster and quit
sooner.
·
You want a guaranteed rate of return. Paying off
your mortgage guarantees you that savings rate.
Investing in the stock market can never guarantee you
anything.
·
You live in the U.K. or perhaps another country
where there is NO tax benefit to carrying a mortgage.
·
You are disciplined enough that once you have
paid off your mortgage, you will invest the same
payments into a retirement fund until you have enough to
meet your retirement needs. (You should do everything
possible not to allow your home mortgage payments to
continue past your retirement age.) Remember, with no
mortgage, your required retirement income will be
greatly reduced.
Despite
this, some people still argue that paying off your
mortgage is a bad financial move!
They
will do their best to convince you that you will get a
higher return in the long run if you invest your money
instead. While there is some chance that you will
achieve such a feat, there's also a BIG chance that you
won't. Given the choice between a guaranteed savings of
say 5-7% interest on your mortgage (compounded for 25
years), or the possibility of achieving some other rate
of return (which may be higher or lower), the wise
decision may be to be conservative and opt for the safe
bet.
Of
course, the entire argument is moot when you truly look
at the facts of the situation. Most people buy a home so
they have a place in which to live. Even if it doubles
or triples in value, they aren't going to sell it, and
if they do, it will take every penny they earn to buy a
comparable home in the same neighbourhood. Besides,
since you can't live in an investment fund, you probably
didn’t buy your home with one eye on beating the return
of the FTSE 100.
At the end of the day, the decision to keep pay your
mortgage over a normal term or to apply strategies to
aggressively clear it is up to you. However the
arguments for eliminating your mortgage as soon as
possible are compelling. If you agree, this next part is
must reading.
So
just how do you pay off your mortgage quickly?
Basically, the key to paying it off is simple:
pay your lender more money!
But
of course, there is much more to it than that. You
do need a
mixture of common sense and shrewd strategies. We suggest
that you should take professional advice from a
qualified mortgage advisor who can assist you to
evaluate your overall financial situation.
However,
remember that most
of these don’t advise you to get radical with your
mortgage and have probably got long-term mortgages
themselves. You might just want to make sure you speak
with someone who feels as strongly about rapid mortgage
elimination as you do.
Here
are some ideas, which may, or may not be possible,
according to your specific circumstances and the
features of your current mortgage:
-
Save as large a deposit as you can. While financial
institutions will usually lend up to 100% of the
purchase price of a property (or more in some
circumstances), this will leave you paying more
interest and benefiting less from the equity growth
in your property. If you can save a 10-20 per cent
deposit you'll put yourself in a much better
position from the outset.
-
Choose the right mortgage. The residential mortgage
market is one of the most fiercely competitive in
the country and there are new products hitting the
streets every week. Some deals seem attractive at
first glance, but watch out for hidden costs - in
addition to interest rates you need to find out
about arrangement fees, redemption penalties, loan
establishment fees, monthly fees and any other
expenses.
-
Make extra repayments. If you do this consistently
you will obviously pay your loan off faster than if
you only meet the monthly minimum payment. You will
also cut down on the amount of interest you are
paying. However, you need to take into consideration
any other debts you might have, as these may need to
be cleared first.
-
Some mortgage plans offer a bi-monthly payment
schedule, which results in one extra payment per
year. It's a great strategy, unless there is a fee
associated with it. If there is, simply set aside
some cash and make an extra payment on your own.
-
If your career advances over the years, put those
pay increases and bonuses to work by sending them to
the mortgage company. They tend to just “disappear”
into unspecified expenditure, which achieves nothing
for you in the long run. Just think, you were doing
just fine without that money, and you won't miss it
if you don't get used to having it in your budget.
-
If you have an uncompetitive mortgage now, consider
remortgaging. If you can reduce your interest rate,
shorten the term of your loan or both, remortgaging
can be an excellent strategy.
Get
Started Now!
There really is no time like the present to begin your
quest to pay off that mortgage. Start by reading your
mortgage repayment (amortization) schedule. Once you see
exactly how much of your monthly payment goes to
interest, and what a tiny portion goes toward paying off
the principal, you will realize that every extra pound
you send reduces the portion of your payments that
services your interest expense. It's a powerful
motivator for financially savvy individuals.
If
you focus your efforts on the task at hand, you will be
surprised at how quickly you can eliminate a mortgage.
With that mission accomplished, you will find that the
comforts of home are even more pleasurable when it is
you - not the bank - who owns the home.
We'd like to emphasize again that it might be best to
take financial advice before embarking on a rapid
mortgage elimination programme or in assessing how the
above points apply to you.
We would want to make sure you are financially secure,
with no other significant debt, and have money in
reserve for emergencies. As qualified Mortgage Advisers
we would be more than happy to assist you to
review your situation, without obligation.
