January 2021 Newsletter – Shorten Your Death Pledge

4 February 2021 · General news

Etymology is the study of the origin of words. I know, it’s weird that I am genuinely interested in this stuff.
Did you know that mortgage literally means death pledge?
Am I the only one who thinks it’s ironic that you take out a death pledge on a place you live in?
Sometimes it can feel like a mortgage is going to be with you until you die. I mean, 30 years is a looooong time.
But don’t be disheartened because the true meaning of the word is actually supposed to be focused on the contract (the pledge) being dead and NOT YOU.
Today, let’s focus on the positive connotation and the death of your loan contract!
I have had a think about some ways in which you can shorten the timeframe taken to repay your loan and thought I’d share.
So, here goes:
1) Don’t bite off more than you can chew
Sounds obvious but if I had a dollar for every time someone has started off our chat with the question of “how much will a bank lend me?”, rather than starting with “how much can I afford to repay without putting too much financial pressure on our household?”, well my mortgage would be dead already too.
This means budgeting based on what you can afford to repay. Remember, rates have never been so low and one day they will go up. Building a buffer on your affordability today will certainly help you to repay your mortgage quicker. Which brings me onto #2
2) Make extra repayments
Duh, sounds obvious right? But here’s some context… paying an extra $100 per week on your $500k loan could save you 90 months (that 7.5 years!!) off your loan term!
Of course if you have already stretched to take out the loan in the first place then this is an unlikely scenario (See point 1 above)
3) Refinance to lower your rate but keep paying the same repayments
With this concept you won’t need to pay anything extra off your loan at all. As an example, if you continue to make the same repayments on your $500k loan but save 0.5% pa in interest vs your current rate then you could save almost 3 years off that mortgage! That’s the power of refinancing to a better deal (and keeping your current lender honest).
4) Use an offset account
If you have cash in the bank it could be offsetting your home loan interest. $50,000 stored in an offset account could be saving you circa $1,500 per year in interest (based on a 3% home loan rate) and/or save you almost 5 years on a $500k mortgage.
5) Become a rent-vestor
I know, left of field but rent-vesting is simply renting where you live and owning an investment property instead. The reason this might work is that you may end up payingless per week in rent than you are actually receiving. Especially given that all of your property expenses will likely be tax deductible too.
So, even if you just swap houses with your neighbour and each pay each other the same rent you will be in front at the end of the year due to the likely tax deductions.
The extra savings could be redirected into paying off your home loan and/or acquiring another one.
Having personally done this for a long time now I can walk you through the ins and outs if you like.
In summary, your mortgage can die sooner than you and much faster than you think, if you take some action.
Let me know your thoughts and/or how you are going to shorten your pledge in 2021