I live in Sydney and about 90% of our clients live in Sydney.  What that means is that a lot of people that we work with, if they have recently purchased a house to live , have paid a LOT of money for it.  And if they’ve paid a lot of money for the house, there is a pretty good chance that they have a decent sized home loan.  As an example, I had a client recently buy a house.  It was a modest but nice house in the Inner West of Sydney.  They had almost $800,000 in the bank as a deposit.  $800,000 used to be enough to buy you just about anything you wanted, but those days are long gone.  It was a good sized deposit, and they only had to borrow $1,000,000 to buy their new family home.  Now I’m advising them on how to pay off mortgage faster.

Growing up, $1,000,000 was the magic number that few people would ever obtain – now, that’s just the loan that we take out when it’s time to buy a house.  While interest rates are low (the interest per year on that loan would be circa $45,000 per year), you still need to pay back One Million Dollars to the bank to own the property.  It’s still a staggeringly high number, yet it’s a number that we’re becoming very quickly comfortable with.

Here is the good news

So when you owe the bank more than $1m (see what I did there, I made the number smaller by putting an “m” on the end, much easier to look at now isn’t it?), there really is only one day to deal with it – break it up into bite sized pieces that you can tackle bit by bit.  Futher, think about the future.  As time progresses, inflation kicks in and what was a lot of money, isn’t quite as much as it used to be.  Remember when you could buy a can of Coke for $0.50?  They’re a bit more these days, but they don’t actually seem any more expensive.  If you wage increases by 2-3% per year, then in 20 odd years, you’ll be earning double of what you are now, and that will help with bringing your debt down.  So in theory, as time moves on and your debt falls, it’s going to get a lot easier than it is now.

Go without

This idea is nowhere near as popular as some of the more outrageous claims being made in the mortgage industry (like “Pay your home loan of in just 7 years”), but it’s a reality.  Every dollar that you spend elsewhere is a dollar that isn’t paying your debt off.  Be tight, be frugal – but still have as much as you can.  Drink less, walk more, rather than feeling like you’re sacrificing everything, turn it into a new way of being.  So many people waste money and have no idea where it’s gone.  If I gave you a Ferrari, you’d remember where you parked it.  Why do people, when I ask them where their money has gone, have no idea what they’ve spent it on.  It shows a complete disregard for the energy and effort they put into earning it.

Invest into something solid

If you’ve got the equity and cash flow, look at investing.  If you can neutrally gear any investment (shares or property), which is pretty easy to do if you know what you’re doing, then any long term growth in that asset is going to be worth something to you.  At some point, it’s value may equal your mortgage which will allow you to pay your debt off much sooner.  An example would be an investment property – if you purchased one today for $600,000 and in 15 years it went up to $1,000,000 – that’s $400,000 if you sell down (I’m being very simplistic).  Pay a little tax, then put the rest off your debt.  In 15 years, it’s likely you’ve paid off maybe $400,000 of your $1m mortgage, so paying off another $300,000 (after tax proceeds) leaves you with only $300,000 owing.  Boom, more than half the mortgage done.  If you’re more aggressive and buy more properties or shares, the number can get much bigger and it will be possible to be debt free in 12-15 years instead, but you’re taking more risk that way.

Always chase the rate

Anyone that tells you interest rates are not important are full of it.  Reducing your rate means you’re paying less to the bank, which leaves more for you.  How can that be a bad thing?  The only negative is if you end up with the wrong loan structure.  Use a mortgage broker that knows what they’re doing, that you trust who is professional, and you’ll be ok.

In most capital cities, buying a house is an expensive ordeal and it’s really important that you do your numbers right. Be careful that your budget will support it and make sure you’re on top of any changes that may be coming up such as change in jobs or having kids. And don’t take the status quo as your lot in life – always keep looking for an improvement. Improve your knowledge and get some professional help. For your mortgage too.