What would you do if you did not have a mortgage, and actually owned your home?
64..But first you have to get rid of the mortgage!
At present I pay about $2,000 a month on my home loan and we spend about $4,000 a month on eating, drinking and dressing etc... We are by no means big spenders but we are comfortable.
This means I need about $72,000 a year after tax or a gross income of around $95,000 a year to break even. If we want to have any savings or do anything special then a little extra is needed.
If I did not have the house loan to pay then we would only need $48,000 a year after tax or a gross income of around $65,000 to be in the same position.
So the reality is that I could work less or work as much but have $2,000 a month more to spend!
The good news for us is that we have re-organised our finances in such a way that getting that home loan down to zero is happening much faster than it might have done before so looking at a debt free situation is a reality not a dream!
What we did is move our loan from a normal 25 year principal and interest mortgage to an offset loan. I am not a finance person so will try to explain it simply as follows:
Supposing we had a $100,000 loan at say 8% interest and an income of $6,000 per month.
Please do not take any of these figures as definite. I am only doing this roughly to explain the way it works - check with a financial advisor for your own details.
Normal P&I loan: $100,000 at 8% per annum for 20 years means that you might have a repayment of $1,900 per month. At the end of 20 years you have paid out $460,000. You can certainly bring that down a bit by making bigger payments but that is the basic figure.
This is where most of us started on the home loan ladder and it is pretty depressing seeing the statements and feeling like you are never really making any inroads into the debt. Luckily our house values have rising and so we do get some sense of satisfaction because we have a little more equity in the property itself.
Offset loan: Same $100,000 at 8% but this is how it works:
All your income and expenditure is managed in the one account. All your income goes into the account and you do all your expenditure on a credit card that you pay out to zero each month - that way you get the credit free period.
On, say, the first of each month, the bank will look at the balance you have in your account and calculate the loan interest to be paid based on what is in the account.
So: $100,000 debt but $6,000 income so the interest is calculated on $94,000 (approx $650).
Get your credit card cycle adjusted so that the payout date for the card is just after this (ask them, they will do it for you) - then pay your credit card in full. Say $4,000.
So you have brought in $6,000 and paid out $4,650
Next month the process starts at $98,650. Income of $6,000 in and interest calculated on $92,650 (approx $620) - expenses of $4000
and next month you start at $97,270
and so on.............
I worked out that I could clear my house loan in 11 years instead of 25. How great is that?
A word of warning, though, it does require discipline. Because you are working with an offset loan, the $100,000 is always available so if you have an emergency and you account is at $90,000 you actually have $10,000 in hand as you can always use the money up to the limit that you originally borrowed. It looks great as it gets bigger but the temptation to spend it is a tough one but if you have to use it then you are only ever paying interest on the money you actually owe.
Also, the issue of running a credit card on zero is vital as you don't want to have any other debt but your offset account to service.
Talk to a financial advisor and get the proper figures but for me this has been the best thing possible and it has liberated me from the drudge of being a mortgage slave.
I still have to manage this and watch what I spend but I have never felt more in control of my own finances than I do now!
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Comments
I can assure you it is not ridiculous financial planning. Just go ask a professional.
Secondly I am not 'playing' with credit cards - just using it to my advantage.
Thirdly, if we had an accident we would have problems no matter what arrangement we were under - that is what you have insurance for.
But all I am doing to sharing my experience - you don't have to do what I did but I know what a difference it has made. Just don't knock it until you have checked it out...
And when you have I will accept your apology gracefully!!
Its perfectly logical to me Caryl - but some people just have a bindspot with figures - you have taken control rather than following the herd - well done! Of course the banks love off-set loans for all the same reasons they love credit cards - people are stupid and use the credit because its there instead of paying it down. You should put every expense you can on a credit card that gives you some sort of free reward too - we get a free flight a year because of our spending! Just make sure the card has a good long interest free period, the actual interest rate doesnt matter becasue you aren't paying it! offsets are also great if you have uneven income, commissions, bonuses and the like! We are lucky enough to own our own home - bu we use offsets extensively to manage our investment properties.
Oh and I just noticed you are an Ozzie - dafla may not have realised which currency you are talking about - my partner and I have been in Perth for about 6 months and before we had jobs found that living, not commuting, no bills apart from internet, power, $260pw rent we were still paying a $1000/week to live - so your figure sounds pretty reasonable for a professional living in a big city and obviously having a life not just getting by!
Thanks Lissie for your comments and I did forget to mention that I do get flyer points on my credit card so we enjoy that as a little bonus also!
Good for you for owning your own home - I am still a few years away but not many...
Hope you are enjoying Perth, it is a lovely part of the World even though I prefer Melbourne!!
Caryl,
Thanks so much for your input. I have that same type of loan here in the US. It is called a Mortgage Accelerator or Mortgage cycling. It is a great loan for me. I understand perfectly what you are talking about. It is relatively ne here in the states. There is also another product here called the Money Merge Account, which does thesame thing, but works with a 1st mortgage and a line of credit to help pay down the mortgage early. You can lern more about it at www.eraseinterest.com.
Education is a huge part of learning and accepting something new.
Thanks again,
Kim
I agree with you Kim, when we first started to hear about this we were pretty doubtfull - it sounded too good to be true! And we also wondered by the banks had kept it such a secret.. I guess they earn more the other way!
Well, can I beg to differ?
Caryl is doing better than most people, whether in the USA, Australia or the UK.
But with respect, this kind of thinking is what keeps the poor and middle classes struggling (rather than poor), while the rich (who do learn to think about things differently) just get richer.
We encourage all of our Money Gym clients NOT to pay off your mortgage and to use interest only mortgages. We also ask them to consider always borrrowing to the maximum allowed and to put aside some of the borrowed money to pay for the borrowed money.
Everyone always has a heart attack when we mention interest only mortgages, but when you consider that, in the UK you could buy a house for £6000 or $12,000 the interest on a loan of that size - even if 100% - would be less than the average paper bill nowadays......
Doing it this way has three main advantages:
1. You still have no mortgage outgoing every month so you are better off today
2. You have a lump sum sitting in your bank account (liquid cash) rather then in your equity (equity is not liquid especially in a credit squeeze like we are seeing now)
3. You dramatically minimise the inheritance tax liability for your kids, while enjoying your money while you are alive.
If you would like to learn more about a different way of thinking, come over to my hubpage.
Warm regards
Nicola Cairncross
Wealth Coach
Nicola,
That sounds a really different way of doing it and I will certainly have a look at your hub. I do recall having an interest only conversation but it was still paying a sum each month... Do tell us more, and especially where in the UK we can buy 6000 pound houses..
Veeery interesting!
Dear Caryl
So pleased that you were not offended - some people get very upset about new ways of doing and thinking about things. The point I was making, was about if you had bought your house in the UK (and probably Australia too) in the 1960's you would possible have paid about £6000 for it.
Your mortgage (say 100%) would have been set at around 6% per annum say, and would have been £30 a month. This might have seemed a lot then, but less on interest only than repayment but you might have worried about paying it off.
Now, just say 25 years later comes to pass, and your mortgage expires. This would have been in 1990 if you had bought in 1965. Your property would have doubled in value every 7-10 years (according to the Office of National Statistics website in the UK, and similar for the USA and Oz I think) so your house would have been worth £12k in 1975, £24k in 1985 and by 1990 it would have been worth £19,300 odd.
Now if you went to any building society and said "Can I remortgage for £6000 on a property worth £19,000 they would say no? Its only 31% borrowing to equity - they would bite your hand off. Interest free of course.
If you went to say 70% of £19,300 your new mortgage would be £13,510 with monthly repayments of £67.55. If you took say five years worth of mortgage payments - £4053 - and put them in a high interest deposit account, you would not have to pay your new mortgage out of your own money for five years, and you would get the use of the remainder, £9000 odd, tax free as it's not earned income.
Or by then, you might have had a 0% credit card you could have paid it off with! Moving it around from card to card of course.
But what is really interesting, is what would have happened since. Your property, which in 1985 was worth £24k, in 1995 would be worth £48k and in 2005 would be worth £96k.
Of course you are assuming that property is going to carry on doing what it's done since governments started keeping records of these things....but in England the demand for affordable housing is outstripping demand, and it has doubled every 7-10 years - less in the South East where demand is highest.
This radically turns conventional thinking about the "work hard, pay off your mortgage" ethos and it takes a while to get your head around it.
But just imagine what you could do, if instead of spending the£9000 excess from the re-finance, on hoidays, shoes and cars, you re-invested it in more property?
You would be getting the compounding effect working twice for you - once in your own property doubling every 7-10 years, and also all your other properties doubling every 7-10 years.
Cowabunga!
I'm just about to publish a hub showing the effect of this in real terms.
Hope you enjoy it!
Wow!
And certainly not taking offence - love new ideas!!! I see how it works so will now go and see if I can apply the figures to my own situation.
Give me a few days to get my head around the numbers and then watch this space for a whole heap of questions.
Thank you for opening a whole new door.
i have done that! - the answer to the question: what would you do if you had no mortgage or debts? - you begin to live! you ask yourself - what is it that i really want from life? what is my potential? what is it that i want to leave behinfd as my legacy to others, when i am no longer here? what do i want to be remembered for? why have i lived? finding these anwsweres is the most wonderful period in your life. it means freedom to be you.
what di i do to pay off opur mortgage? i became serious about understanding the difference between what i needed and what i wanted. when i wanted icecream - i asked myself: what nutritional value does it have? can i do without? - and the cost of icecream went into the loan repayment. i decided only to eat nutritions foods, cut out sweets, cut out restaurants (i am a very good cook), invested an a big TV and organised home entertainment in a delicious way that beats going out hands down. and lots of other things. just turned my life around to see what really has value, and deserves MY MONEY. it was a big eye opener - and my life feels worth so much more now, that i am not a slae to fashion or trends.
There is an old quote that my mother used to say to me when I was young:
Look after the pennies and the pounds will look after themselves
You have proven how this can really work - well done!
Great hub! We recently paid off our mortgage and now I'm able to stay home with our two children instead of teaching full-time. We are credit card debt free and it is an amazing feeling. We did sacrifice some things to get to this point but it was well worth it to be able to watch our children grow up.
working
dafla says:
3 months ago
Wow. I'm thinking if you didn't spend $4,000 a month on "eating, drinking, dressing, etc." and instead used that money to pay off your mortgage, you'd have it paid off in half the time.
That is, if it was really important to you to pay off your mortgage, you'd be willing to cut back on some of the extravagances.
And oh yeah, it's very dangerous playing with credit cards for any reason. What if you and your husband were in an accident, and suddenly couldn't pay any of this stuff?
I'm sorry to say this, but this is just ridiculous financial planning to me.