|30 Years vs 15 Years of Payments on a mortgage of $400,000 at a 5% interest rate|
|30 Years of Payments||15 Years of Payments||15 years paid fortnightly|
|Monthly Payment||$2,147||$3163||$1582 fortnightly|
I am not kidding, this is what you will eventually do, if you are clever. To get a mortgage you may sign yourself up to the devil, a 30-year mortgage, interest only. That is fine for the first couple of years. But, guess what, your incomes will rise and then you make the following actions:
- Pay-off all credit cards and never use them again for borrowing, only people with a drug addiction, shortage of brain cells, or in a major family crisis do this. All you do is make the pin striped suited finance people drink more champagne.
- Pay off student debt
- Pay lump sums into the mortgage with the highest rate (you will have split your mortgage into three -see below).. Normally you can make up to three payments a year. A gift of family money etc.
- Change your monthly payments to fortnightly. You will make an extra months payments this way.
- Keep upping the repayments to stop feeling rich and wasting mooney on expensive holidays
Ben Keys, an assistant professor of real estate at the prestigious Wharton School of Business, likened paying off a mortgage early to giving yourself a forced savings account.
“One of the ways people build wealth is not just seeing the price of their home going up over time, but also from the element of paying off your mortgage. When you choose to pay the mortgage off early, you’re sort of tying your hands to saving more on a regular basis month-to-month.
Structuring your mortgage
You will never get your interest rates right, so do not try. Split your mortgage into three tranches.
- Lock in between 40-60% in a fixed three to five-year rate (if rates are below 4% go for the higher amount)
- Have $100,000 in a floating orbit account where your whole salary goes. That way every bit of spare money is working. Whilst the interest rate is higher it is worth it. In addition, you can use the spare facility for a major renovation to the house without having to ask for permission. Note that you have to trust yourself to not use the spare balance on consumables.
- The balance left fix on a two-year fixed rate.
This way you will never be right or ever wrong. You have different times when you can lock in rates.
Refinance with a shorter-term mortgage
There are always closing costs associated with refinancing. The rule of thumb used to be that you needed the interest rate to drop 2% in order to make refinancing worthwhile. If you follow my advice your will never need to refinance because you locked yourself into the wrong rate.
This is an extract from a book called ‘Don’t say I didn’t tell you’.
The past has great lessons to offer. Whilst technology and the evolving pace of change may lead millennials to thinking that what is ahead of them is unique. In fact, it has all happened before. I am a father in my 60s who has gathered many lessons from the past, and I set them out here for my daughters in the vain hope that they will be a guiding light long after I am physically gone. Some of the suggestions may seem ridiculous at first, but I ask you to chew the crud and make an informed decision later. For a list of topics covered see here.