We usually buy too much house. The maths in a lot of countries shows that renting makes a lot more financial sense (every model I’ve built, has had the same conclusion), in terms of risk and return – assuming we invested the difference.
Yet, I still find myself perusing properties that meet my (non-financial) criteria and this post is not on the merits of renting vs. buying, or investing in rental properties vs. ETFs.
This post is about the levers we can pull to rapidly pay down our mortgages/bonds in a much shorter time.
In South Africa, with about a 10% bond rate, house buying makes more sense if I either pay cash or accelerate my payments. It also means that if I do have a mortgage, its the most secure effective return I can get, as it sure beats 99% of the saving rates available.
Better returns may be found else where, but this is not about optimising returns. This is about hacking the mortgage. Paying it down earlier to give you the mental freedom that comes with be mortgage free.
Disclaimer – The below may contain errors and simplifications – but is done to make help hit home the impact of small changes.
Download the Mortgage Hacker Spreadsheet to play around with your own numbers. I’ve left it currency neutral. It would probably work for any loan, but it was designed with a Mortgage/Bond in mind.
Our baseline is a 2 million mortgage, at 10% over 25 years.
Assumptions and Notes
- Interest is assumed to be compounded daily
- Payments can be made on week-ends
- The impact of leap years is ignored
Lever 1 – Reduce the Mortgage Amount
There are three obvious ways to do this. Buy a cheaper house, increase the deposit amount or negotiate the price/fees down.
In our example, a 50,000 (2.5% of the total) reduction in your loaned amount, results in about R500k less to be paid over the life of the mortgage.
It is tempting with large numbers to assume a small difference has minimal impact, it doesn’t.
Lever 2 – Reduce the Interest Rate
It is very tempting to just go with your current bank provider or the first place that offers you a mortgage. This is a horrible decision and it’s a big mistake to be lazy.
A mate of mine says his preferred method is to pick 4-5 providers, then bounce between them for the most competitive rate, he then goes back to them all again to see if they can beat this rate. It may feel like playing in the margins, but it in our example, a realistic and seemingly trivial 0.25% interest rate decrease, knocks off 400k and two years.
Lever 3 – Move your Payment day
This one perhaps is playing in the margins, but they are thick ones. This one may also have minimal impact on your cash flow.
If you have a rental property or don’t get paid at the end of the month, it may be worth shifting your mortgage payment day to a couple of days after you get the cash inflow. In our example, shifting it from the end of the month to the middle, gave us an additional 6 months of financial freedom.
Lever 4 – Increase your Mortgage Payment
This is a game changer, a lot of mortgages that I’ve seen allow over-payments of up to 20%. In our example, I split the difference and increased the monthly payment by 10%.
This reduced the interest payment by over half of the original mortgage amount.
Lever 5 – Increase your mortgage payment annually
Inflation and career progression often mean that our salaries increase every year, but we tend to keep the mortgage payment flat.
Increasing the mortgage payment annually will decimate your mortgage.
Lever 6 – Make an additional payment upfront
Similar to negotiating the bond down, an extra payment upfront is also a win.
One extra payment upfront in our example knocks a whole year off.
Lever 7 – Extra payments each year
Some of us are fortunate enough to get a bonus/13th check. Which typically goes to debt or holidays. If a portion went to an extra payment each year. It is another win.
Another 1m off. 🙂
Levers on Levers – What if we did them all?
Given your personal financial constraints, it may not be possible to do all of them, but what if it was? What would be the impact?
2.5m in interest saved and the mortgage smashed in 8 years. But why stop there? – Many in the FIRE community would be pushing these boundaries even further, but I’ll leave that for now.
What can you implement ASAP? Which can you work towards? What levers have I missed? – I’d love to add more