Home Truths: Slash mortgage life

John Bolton. Photo / Supplied

What if you could pay off your mortgage in 15 years? It's actually easy but most people don't achieve it because they don't set goals and don't take action.

Most of us end up working for our mortgage. We get caught between juggling our debt and trying to buy stuff we probably don't need. Everyone wants to be debt-free. It is just the time frames to get there that make it so daunting.

Let's face it, the easiest your mortgage will ever look is just before you buy. Once you move in with your mortgage, reality sets in fast. That budget you did as you contemplated paint colours begins to look extremely optimistic.

Banks want to make sure you can repay them, but they don't really care about your morning latte or pay-TV bill. Being realistic and fronting up to your financial vices is something you need to do for yourself.

If doing a budget feels laborious then a shortcut is to simply look at your total rent and savings as a proxy. Is this enough cash flow to substitute for mortgage payments (and rates and insurance?) For example, $500 a week in rent and $1000 a month in savings is equivalent to the repayments on a mortgage of $430,000 at an interest rate of 7.5 per cent.

When you apply for finance the process is backward-looking. The focus is on demonstrating that you have had the ability to pay a mortgage. Looking backward avoids the traps that can lie ahead.

For first-home buyers in their late-20s the obvious speed bump is starting a family. Starting a family at the same time as juggling a mortgage will most likely be your biggest financial challenge, followed closely by trying to buy your partner out (financially) after a messy divorce.

If you plan ahead, starting a family can be incorporated into your mortgage. At Squirrel we look at how quickly clients can reduce the mortgage to a point where they can afford it on one income. Alternatively we help them build a savings buffer they can use to cover maternity leave. On average, our clients need $18,000 of savings to cover 12 months' parental leave. If you can plan that into your mortgage from the start then it becomes easy.

The other option would be to borrow only what you can afford on one income, but how realistic is that? In Auckland, the borrowing power of one income will get you a garage in Grey Lynn or into a less-than-desirable area. No matter what your circumstances or what you're planning, the mortgage is the elephant in the room. One simple rule that will get you ahead is to always pay a bit extra, even if that is only $50 a week. On a $400,000 mortgage paying an extra $50 per week will drop four years off its term and save you $79,000 in interest.

You can hammer your mortgage even further by always feeding it half of any future salary increases. This is painless because it is money you didn't have before anyway. Wage inflation is typically running at about 3 per cent but your income tends to increase faster than this with age and experience. So if every year we give up half of any increase the life of a 25-year mortgage drops to 16 years.

Almost all homeowners could pay off their mortgage in less than 15 years, it just requires a bit of planning and action.

squirrel.co.nz