Smart ideas to be mortgage free The Mortgage Reduction Guide Confidence in your Financial Future.
Contents Introduction A role for Mortgages 2 Family property mortgage & wealth accumulation 4 Property & Retirement planning 8 Strategies to reduce your mortgage 11 Information in this ebook is not a substitute for financial advice. It is general and does not take into account your personal objectives, financial situation or needs. When you consider buying a financial product, you should obtain the relevant Product Disclosure Statement (PDS) and read it before you make any decisions. As the information we provide here is not specific to you, we cannot accept responsibility for any actions you chose to take without first getting advice from a licensed financial adviser. Mentor1 Mortgage Broking License Home Loans that help reduce your mortgage 11 Helpful calculators and charts 14 Mentor1 Service Summary 15 Corporate Credit Representative Licensee Broker Group Advantedge Financial Solutions Pty Ltd (ABN 64 117 551 292) Credit Representative Number 392534 BLSSA Pty Ltd ACN 117 651 760 ( BLSSA ) Australian Credit Licence Number: 391237 Level 10, 101 Collins St Melbourne VIC 3000 Tel: 03 8616 1000 Fax: 03 8616 1677 Professional Lenders Association Network of Australia Pty Ltd ( broker group ) ACN 086 490 833 Credit Representative Number: 392535 DKG Financial Services Pty Ltd, ACN 075 585 876 is an Authorised Representative of GWM Adviser Services Limited, Australian Financial Services Licensee, 105-153 Miller Street, North Sydney NSW 2060. DKG Financial Services Pty Ltd, ABN 33 552 292 080 trading as Mentor1 Financial Planning is an Authorised Representative of GWM Advisor Services Limited, ABN 96 002 071 749 trading as Garvan Financial Planning.
Smart thinking! Thank you for downloading and reviewing this ebook. We hope what you read here gives you good ideas and methods on how to reduce your mortgage faster than simply following regular repayments. You ll find it can be an important financial move on one of your most valuable assets. We have many years of experience in financial advice, and regularly help people make educated decisions about how to manage their finances, especially when they re facing important decisions like buying their first home. This guide should help you get a simple, straightforward overview. Be assured you can contact us with any questions. At Mentor1 your first consultation with a financial planner is on us. No obligation, just an opportunity to get to know your overall financial goals. Give us a call today to book a complimentary appointment on 1300 765 811. Liam Diggin Dip FP GC (FP) CFP Principal Mentor1Financial Planning 1
Make your home ownership dream come true Helpful ebooks from Mentor1 Want more detailed help on budgeting, insurance or financial planning? Download our other Mentor1 ebooks. How to protect your lifestyle from the unexpected - The Personal Insurance Guide Simple steps to own your first home sooner - The First Home Buyer s Guide How planning now will put time on your side - Financial Planning for Young Families Guide Counting down toward a better retirement - The Retirement Guide You can take back real control of your finances - The Successful Saving & Budgeting Guide It s the great Australian dream to own your own home. More than just the security of having a place to live, home ownership is a solid longterm investment for most people. Regardless of market fluctuations in rising or falling home prices and interest rates, a mortgage is a necessity for most people. This book aims to help you get to the point of home ownership faster than you may have expected, so you can own your dream instead of the bank. When you use some simple strategies to pay off your mortgage early, you can relax in comfort. A role for mortgages Why we use mortgages With French origins, the word mortgage actually comes from mort meaning death and gage meaning pledge. But your mortgage need not be a death pledge. You ll see it is a helpful financial product that enables you to buy a home. As a security instrument, a mortgage is simply a document to give your pledge to the lender. You are the borrower (or mortgagor); the lender is the mortgagee. The mortgage document, or lien on the property, is the lender s security for the amount you borrow: your mortgage debt. With hundreds of thousands of dollars on the line for mortgages today, repaying the funds you borrow has a significant impact on your budget. This guide lays the groundwork of what you need to think about to make your home your own sooner. Why home ownership is important Until you pay off your mortgage, owning your own home is a misnomer. The lender has legal and financial rights to it while you are repaying your loan. For most Australians, mortgage repayments are the largest expense in their monthly budget. Funding them substantially reduces the cash available to live on, so the sooner they are paid off the better. 2
As you get older and work stability is no longer assured, carrying this monthly commitment can be quite unnerving. Either way, it s not an expense that most people will want to carry into retirement, as it can quickly eat away at the income from your retirement savings. No matter how long you ve been paying your mortgage, it s surprising how much satisfaction and financial freedom can come from reducing this debt and taking outright ownership of the property. The amount you own is also important to your broader wealth strategy, since you can borrow against your home equity (the portion you have paid off on your mortgage combined with today s value of your home) to raise funds to invest for the future in stocks or investment properties or whatever your financial adviser recommends. How do you make every day and every dollar count? Let s set the stage with some basic financial principles. Tax effective wealth creation First, make the right financial moves. Let s look at different types of debt and why it makes sense to reduce non-deductible debt like your mortgage. Deductible debt is debt borrowed for investments, whether property, shares or income producing assets. Interest you pay on your borrowed amount qualifies as a tax deduction whereas your mortgage interest repayments do not. (See Good debt vs Bad debt). As we ve seen, you can use the equity you have in your home as security on an investment loan, at low interest rates, with tax advantages on your overall taxable income. Practice Good Money Habits: Budget Wisely 1. Track expenses regularly. Use spreadsheets or a logbook. 2. Aim to reduce the most flexible areas each month. 3. Save with group buying (quantity) and strict lists 4. Consider extra income opportunities (to add to savings) 5. Compare prices or get quotes on all larger purchases 6. Set aside as much as possible in an untouchable account So the sooner you can pay down your home loan (ahead of any investment debts) the better. And the sooner you start, the more quickly you ll see results that contribute to your overall financial security and quality of life. 3
The family home and wealth accumulation Your home has a significant role in your overall wealth accumulation. Australian property values are amongst the highest in the world so securing a place to live is not cheap. But once paid off, it s a substantial asset indeed and any capital gain made during ownership is not usually taxable. Fortunately to date, investing in an Aussie home has also been quite a stable proposition. In fact, despite some softening in prices after the GFC, we are one of the few countries in the world to have avoided a residential property crash For many families, there comes a time they decide to rent out their current home. Whatever prompts this decision, it s important they consider this in the context of their financial plan and seek tax advice. For example most choose to negatively gear their property, claiming the loss on the property (after interest and other expenses are deducted from rental income) off their taxes. Generally speaking, they will maintain the principle intact and pay interest only on the loan. Every situation is different. It s good to look at the big picture with the help of an informed yet impartial financial adviser who can point out where you re at in the Good debt vs Bad debt categories. Good debt vs Bad debt Borrowing money to build wealth is a useful financial strategy. Understanding how this type of move might benefit you takes careful evaluation. How is your income spent on these types of debt? 1. Good debt: Borrowing money to build personal wealth by purchasing appreciating investment assets. Typically these include: - investment property - shares - business investments - certain collectables. 4
These assets will typically increase in value over time and the interest you pay on the amount you borrow is tax deductible (check if the investment also needs to be income producing to claim the interest). Like any investment, you would only borrow money to do this when the return is likely to be higher than the interest cost. A business case shows the return justifies the expense. 2. Bad debt: Borrowing money to spend on living - credit card debt - short term loans for things like cars, computers or home appliances. Credit cards are the worst culprits, wasting hundreds of dollars per year (or more) in high interest charges. It s best not to have this debt in the first place, or when possible to consolidate it into a home loan where interest rates are lower (but be careful to repay it over the same period as if it were a credit card - so it doesn t give rise to long term interest expenses). 3. Manageable debt: Your home loan falls in this category. It funds an asset which should appreciate in value but is not eligible for a tax deduction on interest costs. These costs are a significant part of your loan and can be as much as double what you originally borrow which is why it is to your advantage to reduce your mortgage as quickly as possible 5
Adopt an Everything Counts Mindset Just as you saved and planned for your home deposit, paying off your home is all about planning ahead for better prosperity in the long run. This doesn t just mean a comfortable retirement, this means creating wealth along the way. The borrowing power you gain by owning your home is one of the ways you can invest in more and more opportunities. But first you have to get there. A Home Loan Adviser can help Banks carry the lion share of mortgages in this country; and you do not have to have all your accounts with one institution. On the contrary, it makes a lot of sense to shop around. This is where a Mortgage Broker becomes an asset and an ally to plan your property finance in sync with your overall portfolio and retirement goals. Brokers work for you, not the lender and can save a considerable amount of time and money doing the legwork of mortgage selection and transfer. This includes knowing lender requirements and who best suits you, the amount you can borrow and the impact of transferring an existing mortgage to a new one. Pay down your mortgage early More and more Australians are repaying their mortgages with aggressive tactics to enjoy the fruits of their labour. A July 2013 article in Business Day, reported that the Reserve Bank calculations show that many mortgage holders now are in the black. As rates have come down, many Australians have kept making repayments at the prior level and are now about 20 months ahead of schedule. The article cites RateCity who have done some calculations on what would happen if most of us kept our repayment levels where they were before rates began to fall in November 2011. According to the comparison site s calculations, the average standardvariable rate has fallen by 1.62 percentage points to 5.69 per cent from 7.31 per cent. On a home loan of $300,000, if you managed to keep your repayments at the same level they were when your rate was 7.31 per cent, you would be paying $2,059 a month. That is equivalent to $300 more than what the bank actually requires today. If you are able to maintain that higher payment for the life of the 30-year mortgage, then you effectively would repay your home loan nine years and five months earlier, and would save more than $150,000. * * SOURCE: Business Day, July 21, 2013, We re back in the black by Penny Pryor 6
Get the right account Financial packages or products today are very different from the traditional Savings, Cheque, and Home Loan accounts. Now there are ways to consolidate your finances into one hard-working account that leverages your funds to reduce the overall term of your mortgage and potentially save you hundreds of thousands of dollars. You ll see more details on page 11. Equity loans for investment Earlier we looked at using equity in your home to move up or out and leveraging your gains from its sale toward an investment property along with your new home mortgage (see page 4). This meant putting equity loans to work. Remember first, any remaining debt on your home should be paid off to gain tax effective advantages of deductible interest on your investment loan (as your mortgage interest is not deductible). But in some instances, particularly with sizable home equity, looking at investment property is a smart option. As an investor, if you have equity in your family home, you can look to buy an investment property and borrow 100% of the purchase price plus the costs such as stamp duty and legals. While you may only borrow up to 80% against the investment property itself (or 95% with the payment of mortgage insurance), you may use your family home or other property as security for the balance. How every dollar makes a difference Although your repayments are typically made monthly, the interest is calculated every day on the balance at the end of the day. The sooner you work to reduce the balance the better don t wait till the end of the month. A great strategy to reduce your balance on a daily basis is to have your salary directly credited to an offset account and pay your day to day expenses out of an interest free credit card. Only draw down on the offset at the end of the period when the bank is about to charge interest on the credit card this payment can be automated. 7
Strategies to reduce your mortgage While most mortgages are written to a 25 or 30 year term, you do not need to repay by these terms. What happens when you use strategies like paying more frequently or finding a home loan to use your total income to greater advantage? Here are three ways to reduce your mortgage term by years and save tens even hundreds of thousands of dollars along the way. A mortgage broker can help you explore the best options based on your lifestyle, lender and financial goals. 1. TIME: Pay it down faster The most obvious way to reduce your mortgage is to pay it down. This means putting all available funds toward home loan repayments, no matter how small. What is important to you? If owning your own home sooner would remove a significant financial burden, make larger, more frequent repayments a priority. Clearly this takes discipline and sacrifice, yet imagine what it would mean to own your home in as little as 10-12 years instead of paying a 25 or 30 year mortgage. What would this do for your family lifestyle? What impact would it have on your retirement plans? Reducing your mortgage term by a third is possible. It s also practical if you are willing to live within a sensible household budget and forgo a few things that drain your wallet. This may mean sacrificing expensive holidays, latest gadgets or frequent restaurant visits. Every sacrifice is worth it as our example shows. The Daily Coffee Grind cut up to two years off your loan term Café Culture in Australia is in its heyday. Who doesn t enjoy at least one good coffee a day? But the numbers add up, especially when you parlay them into what you can save on your mortgage with regular ongoing increase in payments. Consider a $3 cup of coffee each weekday; that s $15 per week or $65 per month if you were to increase your monthly home loan repayment* by only $65 per month, you would save over $28,000 in interest over the life of your home loan. 8
How paying an extra $65 per month reduces your Home Loan No Extra Repayment Extra Payment of $65p/mo Loan Amount: $500,000 Loan Amount: $500,000 Monthly repayment: $2,788 Monthly repayment: $2,788 + 65 Total interest paid: $495,934 Total interest paid: $467,205 Total interest saved $28,729 Time saved 1yrs, 8 month *Calculations based on interest rate of 5.3% with a 30 year term. Figures do not take into account extra fees. No one is asking you to give up your daily coffee. We re just pointing out that a little can go a long way. One-off funds to work in your favour Now that you ve seen the difference our increased regular repayment of $65 makes, consider some of the possibilities to put larger one off funds to work on reducing your mortgage. Think about using funds like: Performance bonus Tax return or refund Christmas bonus Investment dividends Hobby or weekend income Every dollar and every day make a difference to compounding effects based on interest calculations on your day-to-day mortgage balance. For example, let s say you use a lump sum like a performance bonus of $10,000 to pay the loan down at the end of the second year. The benefit of reduced interest expense over the time of the loan would be around $32,000. This is based on $500k at 5.3% interest P&I Loan with Monthly repayments P&I Loan with Lump Sum Payment of $10,000 in year 3 Repayment Amount $2788 p/mth $2788 p/mth Total Interest Payments to the Bank $495,934 $463,984 Time Saved Nil 1yr, 5mths Interest Saved Nil $31,950 The REAL cost of lunch We ve seen the impact of a daily coffee when applied to your mortgage. Now let s look at what a $10 lunch means in real cost with regard to your earnings. When you consider you actually have to earn about 30% more (average household paying PAYG), suddenly the Brown Bag option seems enormously sensible. Remember, this applies to all expenses, not just lunch. Consider your spending carefully, knowing how hard you ve worked to earn your money as well as where it serves the best purpose. 9
Another TIME tactic: Repayment frequency If you are accustomed to paying your home loan each month because you are paid monthly, look at how you could save a significant amount by wisely budgeting expenses and making home loan repayments weekly or fortnightly. What makes weekly or fortnightly repayments a higher returning option is again the nature of compound interest calculated on your daily balance. With this approach, you are effectively making 13 monthly payments in a year instead of 12. This means interest will be calculated on a lower balance each month. It may not look like a lot, but a fortnightly repayment makes a difference when you consider the calendar year will make you pay an extra repayment (without even noticing). The key is to follow a schedule of half your monthly repayments every two weeks. Thus you ll be making 26 fortnightly repayments per year instead of 12 monthly which effectively gains you a month. It is essential to work to the weeks of the calendar, not the months, for this to have greater effect on mortgage reduction each year. Do NOT choose a repayment schedule (even if your bank or lender suggest it) of 12 months divided by two to come up with the equation, or it will make no difference. EXAMPLE of savings based on fortnightly repayments This is based on $500k at 5.3% interest P&I Loan with Monthly repayments P&I Loan with Fortnightly repayments Repayment Amount $2,788 p/mth $1,394 p/fortnight Time To Repay Mortgage 30 years 20yrs, 11mths Total Interest Payments to the Bank $495,934 $400,870 Time Saved Nil 5yrs 1mth Interest Saved Nil $95,064 Again, the secret is in paying half your current monthly repayment on a fortnightly schedule. Our example shows how you can take over 5 years off your mortgage and save over $95,000 10
2. AMOUNT: Types of home loans that work harder Apart from sacrifice and discipline to put all available funds into paying down your mortgage, some home loans are structured to help you get on top of your debt. Home loans have changed significantly over the last several years. You now have many more options than simply selecting Fixed or Variable interest rates. Two of the most useful types of home loans to accelerate home ownership are: Offset Accounts the lender charges interest on the net of your outstanding mortgage less any savings in the offset account. Keeps the home loan and the savings in separate accounts requiring repayments as scheduled over the life of the loan and helping reinforce savings discipline. Home Equity loans has a similar impact to the offset account where interest is calculated on the net of debt less savings. However, its effectively an interest only loan for the life of the loan, with the loan and savings account rolled into one product. Discipline is critical and can be difficult to maintain. Most lenders offer these types of products; a Mortgage Broker can help you find the most suitable one based on your financial situation and goals. An overview of these types of home loans follows. How an Offset Account helps reduce your mortgage The idea of a 100% Offset Account is to reduce your loan more rapidly by using all your income and savings toward the loan while offsetting the interest on your mortgage, without giving rise to a tax event. Remember, if you have money in a typical savings account even one with modest interest earnings, you ll have to pay tax on the interest earned as part of your income. Use this type of account as an everyday transaction account (a debit card usually comes with it) to deposit your earnings, set aside savings and pay your regular expenses. The advantage is that all your funds are at work to reduce the home loan balance that attracts interest every day, every dollar. That said, be sure the interest rates match: Your home loan and the offset account interest rates should be the same known as a 100% offset. Some lenders may offer a reduced rate for the Offset Account known as a partial offset in which case keep shopping until you find a match. 11
EXAMPLE of savings based on $10,000 offset account This is based on $500k at 5.3% interest P&I Loan with no offset P&I Loan with $10,000 offset Repayment Amount $2,776 p/mth $2,776 p/mth Time To Repay Mortgage 30 years 28yrs, 8mths Total Interest Payments to the Bank $499,548 $462,384 Time Saved Nil 1yr 4mth Interest Saved Nil $37,164 Are you a saver? A 2013 national survey as reported in The Australian shows that households are on an upswing for savings with an average of $15,427 in the bank as opposed to $5,155 in 2011. If your savings have kept this kind of pace, you may want to look into a mortgage (like a Home Equity Loan or Offset account) that enables savings to reduce your overall amount owed yet gives you access to funds when necessary. 3. INTEREST: Equity loans for the budget-minded or investors If you can establish and live within an everyday budget, a Home Equity Loan (sometimes called Revolving Line of Credit) is an ideal way to use all of your income to work toward reducing the interest on your loan much as an Offset Account does. Home Equity Loans are different inasmuch as they provide flexibility to use your loan to fund day to day transactions at a lower rate of interest than say, credit cards or personal loans. Mind you, it takes discipline to live with a Home Equity Loan given it has: No fixed term: you are only required to repay interest on the loan, not principle. A value of about 80% of your home s value so you need at least 20% of your home s value as equity (paid) now and in the future. A slightly higher rate of interest, around a half percent. Advantages of a Home Equity Loan give you certain freedoms, including: Consolidate loans and credit cards at a higher rate of interest into the lower rate Home Equity loan Not having application fees or establishment costs Being portable to move with you when you move your home Good investment resources for additional property, shares, business development or higher returning sources of income that can be applied to the debt. 12
An interest-free period credit card (usually 55 days) to pay for regular living expenses. Transparency and management with accounts split separately. A pre-approved borrowing limit which you can pay down and draw back to the limit when required For those with self-discipline, a Home Equity Loan is an excellent option to live within a defined budget while seeing their 25 or 30 year mortgage paid off in as little as half the time. If this sounds like you, talk to your financial advisor or mortgage broker (both available at Mentor1) to see how this kind of loan would work. 13
Timing is everything so start now You deserve to own your home sooner. And the sooner you adopt a strategy and put it to work, the sooner you can enjoy your new found financial freedom. Remember, with compounding interest accruing on the large sums involved in a mortgage, with every day you delay, you re giving real money away. Do your own calculations with the helpful calculators and charts we ve set up here. The calculations are for a Principal and interest repayments. The first graph shows minimum monthly repayments. This next set of numbers shows an increase in the monthly payment by $5 per day, $35 per week, $151.67 per month what the savings would be. As you can see we are assuming a rate of 5.3%, on a 30 year loan term, and we are starting the extra payments from year 1. 14
Meet Mentor1 Want to get your future finances sorted? Think about speaking with a financial adviser to explore your options for a home loan, superannuation, retirement or general finances. We d be happy to see you! Please come in for your complimentary appointment with a Mentor 1 financial planner. Just visit www.mentor1.com.au, or give us a call on 1300 765 811. What Mentor 1 can do for you Mentor1 Financial Planning focus on you and your family s needs. We ll talk about what you really want out of life in the next 5, 10 and 20 years and build a plan around that. We ll help you with your: Budgeting structuring your current finances, pay off your home sooner and still put away for the future Superannuation selecting the right investment strategy and making sure you re not doubling up on fees and charges Insurance making sure you can maintain the status quo, and keep your family s future secure Comprehensive plan finally getting everything sorted and on track so you can live well in retirement Potential investment plans different ideas that can change the way you live your life now and in the future 15
About Mentor1 Financial Planning Mentor1 financial planners offer professional advice. Advice that looks at your current needs and immediate goals, all balanced with a future plan. Like you, your financial plan will be unique, considering your personal goals and needs. We ll go over your options with you and you decide what you d like to do. We will then implement your plan and regularly report back to you. Best of all, we speak your language. We take the complexity out of financial strategy to make it clear, smart and sensible. Getting to know you In the first complimentary session we get to know each other and give you a solid understanding of what to expect from us. Liam Diggin, is the principal financial planner at Mentor. As a qualified planner for over 20 years, he s had extensive experience creating wealth for his clients and protecting their assets for the future. We ll give you a few ideas to think about, along with some financial strategies you might like to consider. What our customers say about us The best recommendations come from the people who already count on us. View our client comments and videos on our website to listen to their whole story. Want to get in touch? DKG Financial Services Pty Ltd, ABN 33 552 292 080 trading as Mentor1 Financial Planning is an Authorised Representative of GWM Advisor Services Limited, ABN 96 002 071 749 trading as Garvan Financial Planning. Phone: 1300 765 811 or (02) 9925 5800 Fax: (02) 9954 6609 253 Pacific Highway North Sydney NSW 2060 Or visit www.mentor1.com.au 16