Two hacks to get you financially-fit before summer
It won’t be long before Spring gives way to the flip-flop of jandals, the crack of tennis balls rebounding off the fence and BBQs offering that oh-so-familiar scent. Ah, Summer…
Last weekend we were standing around watching a mate cook/burn the sausages, rubberise the steak and beautifully cook the garlic bread. One of our mates turned up late as usual, steals one of my beers and looks around the group sheepishly.
Finally, his weird behaviour gets to me and I ask him about it?
“I’ve just paid off my mortgage, no more noose around my neck, no more monthly repayments, and best off all, I don’t have to care about interest rates anymore!”
Recently you may have seen some ads on TV encouraging you to shred your mortgage, and where we are in the economic cycle, this would seem like a great idea.
Paying off your Mortgage faster than your 25 or 30 year term can not only save you plenty of money in interest - that you don’t need to pay, but it can also give you a real boost in confidence in other parts of your life. Such as having the gumption to turn up to a BBQ and drink my beers!
This boost comes from taking control and taming the beast that is your mortgage.
A great first step to taming your mortgage is getting a handle on what your spending looks like. However, if you really want to take a shortcut you could look at the ideal breakdown of where your money should be spent.
I have amassed an ideal breakdown from looking at different clients’ spending habits and combining what I believe to be the best way to split your income in the Auckland market today.
Now, this is based on an average loan amount of $500,000 with a purchase price of $625,000. If you were lucky to buy your house pre GFC then you should be allocating a huge amount to your savings as your mortgage % is probably in the vicinity of 30%.
The ideal breakdown looks like this:
Let me explain a few things: the percentage is the percentage of your take home pay. This is the after tax, student loan payments and 3% Kiwisaver contributions.
So how does this get you to that feeling of accomplishment and relief that you’re taming the mortgage beast?
Well first things first if you can fit your spending into the metric above, you’re already saving 8% (3% Kiwisaver and 5% other savings) of your income per year. That is better than most people in the same situation. Revel in this fact!
Two Loan Repayment Hacks
1) Now you should be putting the 5% savings into your revolving credit. But you should start calling this your, “Revolving Savings” account. The return you get on your savings here is the best return you will find on any on-call savings account by virtue of not having to pay tax on interest saved.
Say your household take home pay is equivalent to $70,000, 5% of this is $3500. As in the example, your mortgage started out at $500,000 and you put $3500 into your “Revolving Savings” every year, you will pay your loan off 5 years earlier and save $86,000 in interest. Not bad for a simple hack for something that you’re probably doing already!
2) The next easy gap to watch out for is your student loan. If only one of you has a student loan and your household take home income is $70,000 - it’s likely that your student loan is costing you $6,100 every year.
Once this is paid off (typically between 3 to 7 years, depending on how much of an allowance you took), it frees up an extra $6,100 per year. If we add this to the $3,500 you are saving, it totals $9,600. Adding this to your Revolving Savings will knock 11.5 years off your loan and save you $170,000 in interest… Pretty amazing, right?
These tips won’t pay off your mortgage in one month, but if you can implement one or two tips like these every year, you will be surprised as to how much time they will reduce your mortgage… Then, you won’t have to worry about your monthly repayments and you can start shouting (rather than stealing beers at the next BBQ).