Over 50% of Australians are financially stressed – and the closer we get to retirement, the more worries we have about our financial security in our golden years. But getting out of this trap is a lot easier than you think.
You might not know it, but there’s an elephant in your living room.
Debt is a simple part of life for many Australians, and while some have their bills under control, too many of us are struggling. The biggest debt – and that elephant? It’s your mortgage. It’s the biggest debt of them all, and considering that you actually live in it, the most important one.
Paradoxically, the fact that we are so focused on paying off the mortgage means that we often ignore other strategies for financial security in later life – ones that create wealth, rather than leave crater-size holes in your bank account at the end of each month.
At Capitl, there’s one thing that almost all our new clients say: “We’d love to invest in shares and property – but after the mortgage, bills, and other monthly expenses, there’s nothing left!”
Perhaps you’re in the same boat. We’ve had it drummed into us to pay off debt before creating wealth. That’s sound advice, but it can blind you to a more fundamental truth: investing, and even borrowing to invest can be a smart financial strategy, especially when dealing with debt and mortgage payments.
Your bank doesn’t want you to know this, of course – your debt is good news for them – but there are several ways you can slash your mortgage payments and finally call your home sweet home yours quicker.
Building Wealth Isn’t the Same as Saving Money
The way that most people build wealth over time is to save their money, putting it into a savings account where interest slowly accumulates. This is slow, and inflation can easily eat into your nest egg.
So, while it’s safe, it’s arguably not very effective or future-proof.
The way people who build generational wealth save is to accumulate assets (such as property and shares) while pushing down any debts. This can be riskier, but the payoff is bigger savings, faster.
By adopting the savings mentality of a wealth builder, normal Australians can cut out their financial worries by building a secure future while reducing their debt at the same time. By retirement, you want to be debt-free, own your own home, and have plenty of money left over to enjoy the longest holiday of your life.
But how does it work?
Deconstructing the Typical Australian Mortgage Experience
Picture the typical Australian family. They’ve purchased a normal home in the suburbs for $450,000 with the kind of mortgage most of us have: minimum monthly repayments, a basic principle, and a variable interest rate over thirty years.
There’s nothing special about this scenario: you’re likely in a very similar one. Now, fast forward twenty years. The economy has generally been good, and house prices went up by 5% each year.
That $450,000 home is now worth $1,100,000. Not too bad, until you consider that the mortgage hasn’t been paid off, leaving the family $200,000 in the red even after all this time.
More importantly, this family has no other significant wealth to speak of, and certainly no assets that generate a passive income. While this family isn’t doing terribly, Mum and Dad are about to go into retirement with no net investment wealth or passive income – but that elephant is still in the room, creating financial stress.
Let’s change the script a bit to show you the difference that a building wealth mindset can bring.
Constructing a New Australian Mortgage Experience
Take the same family as above with the same house. Rather than go the usual route, however, this time they opt to purchase a second home as an investment property. Together, both properties are worth $900,000.
That’s the only real change in the script, but what a difference it makes! Now, the family enjoys extra income each week via two sources: rental income from tenants and tax benefit from the ATO.
More than that, this extra income and cashflow mean that they were able to create a mortgage reduction program with their broker. With the extra cashflow and a favourable mortgage, paying off the debt went from a long, slow walk to a much faster sprint to the finish line.
That’s not all: with the debt paid off faster, that extra cashflow builds up. Twenty years later, this family has a comfortable nest egg and no mortgage. That $900,000 property portfolio is now worth $2,150,000 with a 5% annual growth and no more mortgage.
The elephant in the room is gone. Now, this family can look forward to a retirement without a mortgage where their secondary property provides rental income and a few helpful tax benefits.
With more financial security comes greater choices – and a real chance to relax and enjoy the golden years.
This isn’t an impossible dream – it is something that you can start planning for today, and it all starts with a mortgage reduction program that lets you start using your capital to offset debt while reducing your exposure to the whims of variable interest rates.
Here are a few things that you can start doing today to help you get the mortgage elephant out of your room quicker:
Adjust Your Mortgage Payment Frequency
Interest on your mortgage is calculated daily, which means that the longer you take to pay, the more the interest adds up: and when the interest is on hundreds of thousands of dollars, the figure can be substantial.
By changing your payment frequency from the typical minimal monthly repayment schedule that most Australians use on a thirty-year loan to a fortnightly or even weekly payment, you decrease your exposure to this interest. In turn, you save money and time.
For such a small change, it can have an incredible impact, keeping tens of thousands in your pocket, rather than filling somebody else’s coffers.
Switch to An Offset Facility
An offset facility is essentially a savings account attached to your home loan, an arrangement in which your income is put here instead of your bank savings account. Here, each dollar is offset against your mortgage, giving you a lower base mortgage together with reduced exposure to interest.
While you’re still paying a minimal rate with an offset account, this arrangement means your payments are directed more towards the base payments for your home, rather than the interest. Over time, the offset account grows, further decreasing your exposure to interest while chipping away at your loan.
For many Australians, switching to a mortgage reduction program with an offset account and fortnightly or weekly payments can make a huge difference to the speed and expense of finally paying off the loan in full.
While this can be complicated to understand, the core concept that you should know is that the more money you can store in your offset account, the faster you can enjoy a mortgage-free life.
Start Investing in Property
Now that we’ve dealt with two ways to push down the cost and length of your mortgage repayments, it’s worth exploring ways in which you can make this newly-freed money work for you.
One of the most effective and time-tested methods is to combine a mortgage reduction program like those described above with an income-producing property portfolio.
Your offset account has money in it, helping you to pay off the mortgage faster. But by adding investment properties to your portfolio, you can speed this up even more.
How?
Tenants pay rent to live in or use your investment property, while the ATO offers tax benefits related to your offset. Put together; the increased income pushes down your mortgage base and interest further.
Remember: each payment in an offset account is directed more towards paying off the loan principal, rather than interest payments!
Putting these strategies together into a tailored mortgage reduction program has helped Capitl clients to save as much as 50% of the time it typically takes to pay off a thirty-year mortgage while saving hundreds of thousands of dollars.
What’s more, those dollars – and that extra income from your investment property – stay with you long after you have paid off your mortgage.
It’s Time to Start Thinking About Your Ideal Financial Future
As you’ve seen, it’s more than possible for average Australians to take control of their financial future – and it all starts with a little knowledge and planning. Without planning, it’s all too easy to end up with a stressful burden of debt and a bleak future up ahead.
Buying a property – whether to live in or as an investment – needs to be planned in the context of your own personal financial and life goals. We all need a home to live in – but preferably, without an elephant stuck in the living room and blocking the TV.
If you’re now considering starting an investment property portfolio, you will need to start looking at mortgage reduction strategies open to you. In addition to that, you should be looking at tax effectiveness with regards to your own income as well as potential future yields; you will want to ensure that you always have a good cash flow.
Most importantly of all, you should be thinking about your future: your long-term capital growth strategy has to be a clear vision, and one that matches how you see your overall lifestyle today and in your golden years.
