How i paid off my house in 4 years!
`30 May 2017
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I recently read about a mum who wrote a blog about surviving on $35 a week for groceries. I can't begin to imagine this but I thought, if she can write about that then I can write about this if it helps just one person out there. I have no background in financial services so please, seek professional advice and don't just use my ideas as the absolute strategy. This is just what worked for me and my family. This all came about because I was so excited that I had paid off my dream house the other day. We cracked open a bottle of 1997 Penfolds Grange that we received as a wedding present 11 years ago! (My husband and I had made a pact that we would not open it until we paid off our DREAM home – more on that later). So, I was a little tipsy and shared the news in a facebook group and the response was massive. The thing that strike a chord with me was that many commented that it was like the “impossible” dream. That got me thinking, it is not fair. It is not impossible and if I can share what I did, maybe it would help others. Mind you, I know everyone’s circumstances are different. We work different jobs, different hours, have different family arrangements so I cannot say that what worked for me is going to work for you. I am not a financial advisor, banker, broker, accountant, or anyone qualified to give advice on this. I am also not very good at budgeting so, READER BEWARE! I got some comments too about how this article may be all together irresponsible or set up unrealistic expectations. I had questions about how much I earned, how much my house was worth. I felt that it was all a way of trying to say that paying off one's home is impossible and it is not impossible. Yes, different circumstances and all that by the first step seems to be to be believing that it IS possible and then you work backwards from there. If you go around, thinking that this is impossible then, I can guarantee that it would be impossible for you. So, go on reading if you think what I have to say will be of value, otherwise, stop reading cause I don't want to be responsible for creating false dreams. From my point of view, if my tips help one person save a couple of years from their mortgage, then this has been worth it. I am not saying you will be able to do this in 4 years like I did but surely, any savings that you make off your mortgage is worth it. Get your own advice, do your own research and if you keep reading, I am going to assume you release me from any legal liabilities from my story! Also, I have not researched what I am writing here, I am simply going by my memory of events but the main points of what I did are all here. I really just want to share my story. I am no more obliged to provide my earnings then anyone else. Don’t come back to me and say that you did what I did and it didn’t work out. Read it as if it’s a story and if there is something useful in it for you, fantastic! Get advice! If not, no sweat! My story is no more or less valid to live on $35 a week which seems totally impossible to me! Enjoy!
The picture you see in the main cover photo is the house I currently live in. It is amazing. It is on an acre block overlooking the beach here in Tassie. We love it. This was not the first home that we paid off. Our first home was a pretty little 4 bedroom house in the “suburbs” of Tassie. I use the word “suburb” cause 2 meters either side are literally my neighbours’ houses, which compare to where I live now seems uncomfortably close. Mind you, my “little white house” as I used to call it was still a gorgeous 4 bedroom house. Here is a picture of it. It’s sweet, isn’t it?
We purchased the “little white house” in 2007 at $460,000. I don’t remember how much deposit we put down exactly but it was in the vicinity of $50 – 60K. We were also eligible for the first home buyers grant at the time so that helped a lot. We didn’t have any kids then so that made things a little bit easier. We were on pretty good salaries but we choose not to spend it on new cars. In short, we saved, saved, and saved til we had a sizable deposit.
TIP 1. If you can, save a good size deposit. We were really clear we wanted to buy a house so we made sure we consistently put aside money for our deposit. When you are really clear on your goal and if you have a partner, work together towards the same goal, it makes it easier to decide if you want to go to a fancy restaurant or buy stuff you don’t really need, or put the money into a savings account so you can get your foot in the door! If you have a partner but you can’t agree on what the common goal is, it does make it more difficult if one of you wants to go out and spend the money, and the other wants to save it up. It’s important to talk this out.
First time Home Owners!
It was really exciting to purchase our first home. Even though, we were in our early thirties then, it felt like we were finally grown up. I know it sounds silly but we grew up in the late 80s/early 90s so the “great Australian dream” was what we grew up with. The housing market and affordability has changed a lot since then, of course. One thing that helped us a lot was that we did move to Tassie from Melbourne. Moving to Tasmania meant that we got more bang for our buck! We could buy a cute little 4 bedroom home close to the “city” with the deposit that we had. I am not saying that everyone needs to move interstate but it is worth doing your research and considering outlying metropolitan areas that may still be convenient enough for you to get to work but may be a bit more affordable than the hip and happening inner city suburbs. Again, do your research, check out future, potential town planning activities that may be in the works and you might be able to identify areas of growth that are still affordable.
TIP 2. Talk to people that have invested. Find out the hot areas, that are still affordable. For years prior to making a purchase, as we were saving up for a deposit, I signed up to as many property investing forums as I could just to learn about the different suburbs, and the different strategies people were using. I also read lots of books about paying off properties to work out what would work for me. Buying a home is a commitment, you need to gain as much knowledge as you can! The property market also changes very quickly so keep your ear to the ground and listen in on what people are saying in forums.
False sense of Security
Ok, so at the end of a long week at work, you come home to “YOUR” house and you feel proud to be a “HOME OWNER”. You may even be thinking of having a house warming party, show off “YOUR” home! By all means, enjoy this house that really isn’t really “yours”. But, don’t be lure into a false sense of security. You don’t own your house until the House Title is in your hand! My husband and I used to stand near our letterbox and look toward the dwelling of the little white house and joke about exactly how big the square is that we actually owned. The area wasn’t very big, in the beginning!
TIP 3. Until you pay your house off, it is owned by the bank which means, every day you go to work, you are in effect working for your employer and also the bank. The quicker you pay your house off, the quicker you stop working for the bank indirectly. Banks exist solely to make profits for their shareholders. They are not really there to help you buy your first home. They keep you there on mortgage terms of 25-30 years which in effect means you work for them for that amount of time! So, don’t be fooled that you have 25-30 years to pay it off! That is what they want you to think! To get ahead, you have to tip the scales over the other way by beating what I call the interest scales to your favour!
Go on top of the Interest Monster
The interest on your home loan amount is calculated DAILY!! I find this absolutely mind boggling. It means every day, if you choose to spend say, $5 on a coffee, your mortgage is effectively charging you an interest on that! What do I mean by that? So, for all the money that you hold in your hand that is not offset against your mortgage, you are paying the same rate of your interest of your home loan on that amount. If you had put that money into an offset account, then this reduces the amount that you owe calculated daily thereby cutting your interest. If you are conscious of this, then you can potentially save tens of thousands of dollars off your home loan which means you actually have a chance of paying it off!
TIP 4. Biggest Tip ever as it is two fold! The actual calculation side of things and the mindset side of things. Get an Offset account! Most of the people that I have ever spoken to who have paid of their homes in record time have used an offset account! Get rid of all your other accounts. You don’t need a savings account once you have a mortgage cause what on earth is savings when the interest on your home loan is going to out weight any interests that you earn! Stick the money in an offset account to keep the interest down. You will have a redraw facility whereby you can redraw the money for emergencies if you need to. Get your employer to put you pay straight into your Offset account so the day you get paid, you are already benefiting from having less interest calculated. If you have a partner, get both your pays into the one offset account. Already, just by putting all the money you have into the offset account, you are minimizing the interest on your loan which is calculated DAILY! See, every cent counts, and the timing is everything. I found understanding this point meant I didn’t spend my money on things I didn’t need. The more money I keep in the offset, the less this house was costing me!
Manage your Expenses and Streamline Spending
I mentioned before that just understanding how banks made their money and having a really clear focus on paying off our first house as quickly as we could really helped us keep to our budget and it gave us a really positive incentive to keep as much money in the offset account for as long as we could. Any extra day is an extra saving to us in the long run! Have I said “CALCULATED DAILY” enough time to create real impact in your mind?!!!! I mentioned in the last section about a redraw facility. This basically means that whatever surplus money above and beyond our minimal repayments, we are able to redraw on it without penalty. Again, check with your bank that it is without penalty and make sure you find a product that lets you take money out of your offset account without any additional fees. This means that even though, we were putting in all our money into the offset account, should our car break down or we need emergency cash, we can access it without the bank charging us any penalty fees. The redraw facility also means we can streamline our expenses.
TIP 5. Use a credit card for ALL your expenses. Some offset accounts actually have a credit card facility attached to them. I had a separate credit card outside of my home loan as I like frequent flyer points but again, you need to research what suits you. The point is to pay all your expenses, purchases, bills out of this one credit card. At the end of the monthly cycle, pay out what you owe on the credit card with money in your offset account. This means you clear your credit card debt each month so you are not paying more interest to the bank. But it also means that you have tricked the system a little by keeping money meant for bills for more days that it was due by using the credit card. Let me give you an example. So, say my electrical bill of $350 is due on the 14th of March, if I paid this bill on time with actual cash, it means that I won’t have the $350 as of 14th March to offset the amount of interest CALCULATED DAILY which cost me more money to pay the bank. But, if I paid the electrical bill with my credit card, the $350 is still in my offset account holding fort against the daily greed of the interest rate. If I pay the bill with my credit card, I am actually buying time and a few extra days maybe even weeks, before the credit card bill is due. I get “ahead” of the bank’s little game… Hahaha. (Doesn’t the thought of that feel good? Doesn’t the thought of that make you want to put every cent into the offset? Remember you can still redraw on that if you need money in a hurry for an emergency. But, please pay off your credit card debt each month! Otherwise, you are just saving interest from one bucket and paying out interest on another and most credit cards have a much higher interest rate past the interest free period than any mortgage!
Pay the Bank more AND often
Remember how I said interest rates are CALCULATED DAILY!! (Seems the most important point of this entire ebook aside from get proper advice!) My next tip is to pay into your mortgage more than what they tell you is the minimum required repayment and put money into your mortgage more often!
TIP 6. Forced savings! Banks like to make money. They don’t make as much money from people like me who keep paying off houses. They make money from people who do as they are told which is to make the amount of minimum “monthly” repayments that they are told to pay. Here is another trick, take their minimum repayments and increase it by a little bit, whatever extra you can put in, even if its $50. Then, you go back to the bank and YOU tell them to set your “minimum” repayment amount at the higher figure. This way you are automatically putting extras in every time you repay your mortgage. And, while you are at it, tell the bank that no, they don’t have to wait a month for you to pay them back, you will pay them back weekly or fortnightly cause you are a good person, you feel bad that they have so generously lend you money for your house, you want to repay them ASAP. This means you are in effect paying back slightly more of your mortgage than their “recommended” minimum and you are putting more money into the account more often, thereby reducing the amount of interest you are paying because…. interest is CALCULATED DAILY!!! If you don’t believe me, do a google search and find a mortgage calculator from one of the major banks, have a play! Change the frequency of repayments, increase the repayment amounts by a little and see how much interest you are slashing off the loan!
What does this mean?
So, two things might be coming to your mind. Firstly, what can I afford to buy? And, what I buy that allows me to reasonably service the loan to get ahead? Most people buy their home based on what they can afford and they may have stretched that to the absolute limit. I am saying in choosing your first home that maybe you don’t buy the one that you absolutely love cause you can do that later once you have paid this off, like I did! When you are looking at what you can afford, you also need to be figuring out if you were to put in extra money into your minimum repayments and more often, what is the lead way that you need to make this achievable. I didn’t buy my dream home as my first home. There were lots of things I loved about that house and lots of things I didn’t like about it. The point is I had no intention of living there for 25-30 year or however long most home loan terms are for. I knew I would be there 5 years max that I would pay in off in 5 years max. We, in reality paid that house off in 3 years but using the tips I told you about. We didn’t overspend on things we didn’t need. Almost all our money went into the offset account to OFFSET the interest, which is calculated? (DAILY!!!!)
TIP 7. Look at your first home as setting up your way of beating the bank. Find a house that you like that you can not only afford but also allow you some breathing room to put extra money into your offset and more often. This might mean that it is not the best house or exactly the one that you want but my view is that once you have paid off the first one, you are then in a much stronger position to buy the one you really want. It is purely a numbers game. Get a house that you like, that you could live in for 3-5 years with the view to pay it off and move to something better.
The Great Aussie Dream
Now, imagine my husband and I marching up to the bank with almost half a million dollars in equity after we paid off our “little white house”: “Hey Bank, how goes it? We’d like to borrow another $500K to buy our dream house, thanks!”
And, do you know what they said to us? “Why not borrow more? We will lend you $3million if you like?” Can you imagine the interest on that?!! No, thank you!
And, that is almost exactly what we did. The reality was that I had my first child just after we paid off our first home and we knew we wanted another baby and the “little white house” didn’t have enough room for our growing family. We started looking around for a bigger house. We thought maybe we would upgrade to our next house until we inadvertently found the dream home. I remember walking down the driveway and instinctive knew that this was the “forever house”. I knew the bank would lend us almost anything at that point cause we had so much equity. All we had to do was sell the house we were living in and they’d give us the money. It was a bit of a stretch but we would never have been able to purchase this place if we hadn’t paid the other one off so quickly!
As it happened, due to the sluggish Tassie property market, we actually lost money on selling the “little white house”. We lost about $30K in purchase price and probably another $25K in improvements that we made on it. But you would agree that it was still worth it as we then set forth to do it all over again. Pay this one off as quickly as possible! This time, it took a little bit longer as we now have two kids to feed as well! But, by applying the same tips, we were able to pay off our dream home, our “forever” home in 4 years and now we are debt free! I am still pinching myself
TIP 8. I know it seems impossible and if you had told me this is where I would be 10 years ago. I would have told you that it was a nice dream but if you believe that there is a way and you educate yourself, talk to others who have done it, you can always find a way. People that think it is impossible are rarely curious enough to look beyond. It is not impossible! I’ve done it! I’ve done it TWICE!
(Again, get advice! Don’t sue me! By reading to the end of this eBook, you totally release me from any liability or damages that may occur from the ideas you read here! Talk to your financial planner, accountant, mortgage broker! I am NOT qualified to advise you! I wish you all the very best though!)
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