Podcast: How To Pay Your Mortgage Off Faster – What Homeowners Need to Know | Ep. 220

Posted by Ed McKnight on 23/04/20
How To Pay Your Mortgage Off Faster What Homeowners Need to Know 001
Listen to the Show

Listen to the Show

Show Notes

What's Covered in the Show?

In this episode, we discuss how to pay your mortgage off faster so that you can get in the position to invest in property.

During the show we give the example of a first home buyer who has purchased a $500,000 property with a 20% deposit, we then show how they can reduce the time it would take to be able to buy a second investment property from 4 years, to 3 years and then down to 2 years.

We also mention our free upcoming webinar where you'll learn how to run the numbers on an investment property.


Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show we're talking about debt reduction.

How do you get rid of personal debt so that you're able to invest in more property. Now this is interesting because obviously there are a lot of books out there that talk about how to get rid of your mortgage, how to pay down debt more quickly, and you probably think, what is the secret? What is it that I am missing that is not allowing me to pay off my mortgage more quickly?

Why is it still around and look, the honest truth is there aren't any secrets, but there are a few tips that are quite important and can help you pay off that debt more quickly, which we're going to talk about during the show today, so you don't have to go and read all of those books. The secret which is not really a secret, is what you've got to do is make more payments against your mortgage more quickly. That's the only way to pay it off.

And the benefit of making additional payments against that mortgage is that you're accruing less interest. So even a small or a modest increase in the payments that you make above the minimum can have quite significant changes to how long your mortgage lasts, because then you're paying less interest and then you're paying less interest that would have occurred on that interest and so on.

Now the question then becomes, well, how do I make additional payments against my mortgage and how do I do that? And really, there are only two ways. Again, you can either earn more or you could spend less. Now, of course, earning more. You can do that in a couple of ways by getting a higher paid job, making extra income on the side.

But we're also going to talk about a situation, and Andrew's got a little spreadsheet that he's lovingly crafted, which looks at the example of, well, what if I just got some boarders or flatmates, and what impact would that have in my ability to pay my mortgage?

We're going to get into that because it can be quite significant. But the other way to, I guess, create that cash surplus is the other side, which is looking at reducing your expenses. And there could be something like debt consolidation. Whereas if you've got a couple of personal debts, whether it's a GM finance or a couple of credit cards, and you might be paying 14 15 16% off those, if you're able to consolidate that into your home loan, then you'll pay a lower interest rate. That might go down to three and a half, 4% now.

Within that scenario, you would be increasing the size of your mortgage of one debt in order to pay the other off. But in doing that, you pay less interest and you can put the payments you were making against those credit cards or other personal loans and put that against your mortgage and pay it off more quickly. That's one way. But you can also do some similar things. I mean, how many people actually and routinely go through their bank statements and look at what's coming off that credit card.

The number of times when I've done it, and I try and do it every, every six months or so, you'll be surprised at the amount of stuff that you've actually signed up to within six months. And for me, it's always news subscriptions. It's the NBR and the Economist and the Herald and the New York Times. And it starts to add up quite significantly.

Now, I tend to justify that by saying, well, it's an investment in myself. You will be surprised at the number of Neons, Lightboxes and Netflix, as you might have on there. Now if you're able to decrease a whole bunch of them. Then you might get an extra hundred dollars a month you can put towards your mortgage. The other thing that I do want you to think about as well is work expenses, because this can be a real trap and you might think, well, hey, I'm getting paid back for them, but the issue starts to become a cashflow one or a fact that you've lost a receipt or something like that.

So that's another area where you might just need to convince your boss to buy you a work credit card or something along those lines like I did with Andrew. In order to get those, those work expenses off your balance sheet and put them onto the business, which is, if they are work expenses that's really where they belong.

Now, Andrew, walk us through your amazing spreadsheet and talk to us about revolving credits and some of the ways to structure your mortgages so that if you can create this cash surplus or get this additional income, how you actually use it to pay down the debt. Talk about the nuts and bolts.

Andrew Nicol: Sure. So I just want to talk firstly about revolving credit and structuring your mortgage and then I'll talk about the paying down your mortgage faster and using the two of them together.

So it's really important if you're going to make lump sum payments, or you're going to utilise any of these, this extra income that you, sorry, not extra income, the extra surplus that you've created by reducing your expenses, how are you going to then, apply that to your loan? So bear in mind, most loans don't allow a huge amount of flexibility with making lump sum payments.

I'd always recommend you get full advice from a broker personalised to you if you are looking at doing a model like this. But let's say you've got a mortgage of say, $300,000. And you believe that you can create a cash surplus of say, $100 a week or $200 a week. What you then are going to accumulate within the next 12 months is say $10,000 worth of surplus that you're going to want to be able to put it onto your mortgage.

So what I recommend you do is you create a $10,000 revolving credit facility on your mortgage, so if your mortgage is 300,000, take 10,000 thousand and put it on revolving credit and then what you do is you channel all that surplus through that revolving credit so that in 12 months, that's completely paid off. Now important that your main mortgage has a chunk of that, at least on a one year fixed rate, so that it rolls over in conjunction with the timing of that revolving credit being paid off. So in 12 months time, you can make a lump sum payment, $10,000 off your mortgage.

The revolving credit goes back to negative ten thousand and you do the whole thing again. So your total loan has now dropped down to 280, 10,000 on the revolving credit overdrawn again and you'll repay that and you repeat that process. So you just need to stagger the loan renewals in conjunction with when you expect those lump sum payments to be, and you need your revolving credit to be at least the amount that you expect to pay down over that 12 months, maybe a little bit more to set yourself a bit of a challenge.

You know, if it's 10,000 a month make it an extra 5,000 just to see if you can push yourself that little bit more because, 0 what I've seen in the past is when people are motivated, they actually achieved their goals a lot faster. And so you might be able to actually treat this as a bit more of pushing yourself goal to try and get there faster. And if you've got the goal of buying an investment property, that can be a huge motivating factor to actually achieve that.

Ed McKnight: And Andrew, I just want to jump in there as well just to say that one of the things I really like about revolving credits or offsets is another product you can use, but similar things is that if you're putting that money into a revolving credit, you can do so relatively confidently.

Because if you did need the cash for whatever reason there was a massive unexpected expense, which you couldn't meet through your usual cash flow, you would be able to draw that money back out.

Now, it's not what you want to be able to do, but it's a little bit like, I don't want to call it a savings account because it's not the same as account, but you still have access to the cash if you really needed it, so you can still have the confidence of putting more away than you need to, I mean, in order to achieve that stretch goal that Andrew was just talking about, you can have the confidence of, hey, I've got an extra hundred dollars in my account.

Let's transfer that across. Because if you did need to access it, you would be able to bring that out. But just be aware of the psychological impact as well. You don't want to be doing that too much, taking money out of your revolving credit to spend it.

Andrew Nicol: That's right. And now just want to also talk about, someone, if they were in a situation where they didn't have any usable equity so they'd used up their cash deposit to buy their first house, for example.

I was pretty excited firstly cause I was creating a spreadsheet, but secondly, because the numbers are pretty cool in terms of, okay, let's say we are working with a person who has only just bought their first house and they've saved the 20% deposit on a $500,000 purchase they've got a mortgage of 400,000 they've got zero usable equity from day one. So if they came to us today, there's no usable equity.

Now, if they diligently pay down that mortgage as per the 30 year loan term the payments based on a three and a half percent interest rate would work had to be $415 a week. So that's their minimum payment. Now what I think is a great way of getting the debts down faster is if you are in your owner occupied house, go get a flatmate or get a boarder. Now, I've worked on a couple of boarders at $200 a week.

So if you and your partner are in a house and you've got a three bedroom house rent out another couple of rooms at $100 each, I mean that's cheap, and, and then you've got another $200 a week that you can put in towards your mortgage. Now, I did some calculations on this. If you put your payments up by $200 a week, so to $615 a week on that 400K mortgage and you paid that down, in three years the balance would be down around $343,000.

Now, the great thing is that whilst you've paid a chunk of your mortgage off, you've also had capital growth on your property. So at 5% capital growth, your house value in year three is $579,000 so the usable equity, so 80%, to work out your bank value on the value of your house now, minus the mortgage is about $120,000. So that's huge. And you've actually got three a year earlier by making those payments, which is really cool because you're a year earlier and into the investment market and the sooner you buy your next property is the sooner you can get growth on a second property. And so then it's exponential in terms of your usable equity in the future.

So the cool part there is by three years from today by just getting a couple of boarders and putting up with them and charging them $100 a week in terms of boarder income, three years from now, you buying a first rental property, and actually if you coupled that with paying an extra $10,000 off your house you that buy finding $200 spare a week, you can make those lump sum payments. By year two, you're actually able to have enough usable equity to buy a first rental property. So I think that's pretty cool.

If you stretch yourself to buy your first house now, if you then go and put a couple of boarders in and you find a little bit of surplus income, you've created a bit of surplus, and you save another ten thousand dollars a year to make lump sum payments in two years you're buying your first rental property, which is amazing.

Ed McKnight: So just those again, if you did absolutely nothing, just make the minimum payments. Year four, if you're a brand you've just bought your, your first home, year four would be the time where you'd be able to go and purchase your first investment property, but takes a year off, only takes you three years if you get some flatmates, and those are those figures as well, about two flatmates at $100 each.

It's pretty, pretty conservative as well. So you may be able to do it more quickly than that, put in some savings as well, down to year two and it's amazing that just within 24 months of purchasing your first property and being basically tapped out from an equity perspective, you'd actually be able to 24 months buy an investment property, which I think is motivation enough for a lot of people.

Now, of course, please don't forget to rate, review and subscribe to the Property Academy podcast. It really does help us get the message out to more people and hey, if you want to see more of Andrew running numbers like this, you've got to come to our webinar. It's on Tuesday the 21st of April 7:00 PM Andrew's going to be running numbers like this and we'll teach you how to run these sorts of numbers yourself and what should go into a budget for a rental property.

So I'm going to drop a link to that in the show notes, tap or swipe over that cover art. It'll take you right there. Otherwise, go to Opespartners.co.nz and you'll be able to sign up there.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.