It’s coming up to the Christmas/New Year break and you will probably enjoy some time with the family and friends. It is a time to pause, celebrate and appreciate each other’s company.
Invariably the conversation will move to the housing market: the ever-increasing prices and vexed issue of affordability. How can the next generation – your children, nephews, nieces and the children of your friends – afford to enter the housing market?
When they do – how will they ever pay off the mortgage? At a deeper level, why is it that some people pay off their mortgage faster than others?
And the answer is not income.
In my experience if everyone starts with a mortgage at roughly the same interest rate, and assuming they earn roughly the same household income, some people will pay off their mortgage in 12-15 years whilst some will continue to carry debt well into their late 50s.
People look for quick fixes, magic cures or the “inside secrets of the rich and famous”. Yet there is no magic formula. Unicorns and silver bullets are for fairy tales. In the financial world you have more chance of winning lotto (1 in 8,145,060) than picking the next Google, Apple or Berkshire Hathaway (Warren Buffet’s company) stock.
Good financial habits underpin long-term dreams
The answer lies in doing just one thing – consciously, consistently and with intent: the foundations of all new habits. Mortgages can be paid off quickly if you are prepared to apply yourself.
I have observed this personally within my extended family. A young couple purchased their first house in 2005 when they were in their early thirties. Both have modest incomes from their full time jobs – he is a mechanic and she works as an admin clerk at the local council. The standard variable home loan rate in the first year was 7.3%. In the subsequent years, interest rates have trended down, now hovering around the 4% mark.
The “one thing” that this particular young couple did was to maintain their monthly mortgage payment over the period – they did not reduce their monthly payment when interest rates went down. This is a very simple and effective strategy (due to the compounding effect).
On current projections they expect to have their mortgage paid off by the time they are 45 and own their home outright. In just over 12 years.
Whilst interest rates are now lower, over-paying the minimum mortgage payments set by the bank is still a “one thing” that the next generation can use. Other habits include:
- Apply the net increase from any pay rises or bonuses directly into the mortgage.
- Avoid taking on debt or borrowing against the house to fund consumption, e.g. school fees, holidays.
- Think carefully and obtain expert financial advice before you borrow against the house to fund asset growth, e.g. shares, home improvements, investment property, business investment.
- Avoid interest-only loans and pay an amount off the principal every month.
The key here is in recognising that how you spend your money has a greater impact on long-term wealth than anything else. Not all things matter equally. It’s about prioritising the things that will make the biggest impact on your long-term wellbeing and happiness.
After all, you work hard for your money and there are only 100 cents in every dollar. You want your efforts to add up. This is where longer term plans and clear, mutually-agreed goals come into play.
Whilst it’s nice to go out for dinner, it is even more empowering to pay off your debts. It can be challenging to resist other people’s advice – “live for today”; “your house is going up in value”; “you look great in it and it’s only $100”; ”don’t worry about it” – but debt is debt. It still needs to be paid off and it feels good when you take responsibility.
It also opens up a world of future choices: where to live, what work you do and for how long. It creates the opportunity to pursue bigger dreams.
By doing just one thing consistently and with intent, by developing the financial habit of over-paying their mortgage, these young home-owners have had a greater impact on their longer term financial wellbeing than any fad or magic cure.