Owning your home without a mortgage 

Most people have no idea where they spend their money. And if you can’t see it, how can you fix it, right? The first step to saving money is knowing how you spend it and while this sounds simple enough, many of us have no idea where it all goes. Because of this innocent ignorance, a budgeting system is essential.

Budgeting 101

Make a note of what you have spent over the past 4 weeks. Categorise these purchases under major category types, for example: groceries, medical, entertainment, travel, clothing. Next, and most importantly – think about whether they are essential or non-essential. Play around with the non-essentials. 

What would happen if you cut down or got rid of them completely? 

You will find that small indulgences are adding up. As an example, consider a coffee lover. Just two lattes a day costs approximately $10.00, that is $3,650.00 per annum. 

Imagine they purchased a Nespresso for $500 and two pods a day for $0.50 each. They could save $2,460.00 per annum. Over ten years that is $24,600.00!

 If they had invested that money at a 6% return, then that will be $38,000.00!

If you find charts and spreadsheets confusing, put your phone to good use. Download one of the many automated, and in some cases free, budgeting tools available. These handy apps can set specific goals, track your spending in real time, and monitor your progress on a daily basis. Many have the functionality to actually link to your bank accounts, so you don’t even have to enter the data yourself. How easy is that?!

Here is a list of the most popular apps available in Australia: 

  1. Pocketbook
  2. MoneyBrilliant
  3. Frollo
  4. TrackMySPEND
  5. Goodbudget
  6. Moneytree
  7. ATO app
  8. Finch
  9. ShopBack
  10. Quit that!

Structure your mortgage to suit you

Did you know that you can save thousands of dollars a year without changing your spending habits? By structuring your loan accounts in the right way, you can reduce your interest payments massively. An offset account, for example, links a savings account or transaction account directly to your home loan. A proportion of the balance is ‘offset’ daily against your home loan, and as a result you’re only charged interest on the difference between the total loan balance and the amount offset.

For example, imagine you had a loan of $350,000, and a cashflow balance of approximately $100,000. Even though this $100,000 is 100% available to you, if the average balance stays at around $100,000 you would only be paying interest on the total loan minus the balance or $250,000. That’s a savings of around $4,000 per year (or $120,000!) over 30 years.

But, if you are a big spender, an offset account with access to thousands of dollars may not be smart. By setting up a Principal and Interest loan that is direct debited out of salary big spenders can have their mortgage paid down, super contributions met, and still have the freedom to enjoy whatever is left over.

Invest more money into Superannuation

Your super is a tax effective investment, unfortunately it is limited by superannuation caps. Take a couple of ordinary Australians: Jack and Jill.

  • Jack works and has a surplus of $200 per week to use on his mortgage
  • Mortgage is $400,000 at 5% interest rate
  • Super balance of $50,000
  • House worth $500,000
  • Earns $100,000
  • He is 45

Here are two scenarios:

  1. Use all $200 to pay down mortgage
  2. Use $100 on mortgage and use $100 on super

If he paid the minimum on a Principal and Interest only loan then over 30 years then his repayments would be $2,150.00 per month and in 30 years if it went up by 6% would be about $2,500,000 and super would be worth $585,000. He would have to tip into his super to pay the mortgage off.

If he paid the extra $200 into his mortgage he will have paid his house of at 60 years of age. So when he retired he could have at 65 the house, some savings at about $30,000 and a super balance of $585,000

If he split this with $100 to super and $100 to the mortgage then he would, at 65, have the same house worth $2,500,000 with a loan worth $55,000 but a super balance of $765,000.

Seek financial advice on this one.

Invest

Use the proceeds of your investment to pay your mortgage down. This can be done by investing in an income producing asset or a growth asset.

If the income on the property is greater than the interest repayments, then you have passive income to pay the mortgage down with extra payments. Even if it’s $100 per week, on a 30 year loan of $400,000 that has an interest rate of 5% will be cleared 5 years earlier.

Also, if you really want to secure your financial future then I strongly urge you to look at a minimum insurance of Income Protection (IP).

The definition of IP is generally when you go to the doctor and the doctor says you should not work then you get paid. Consider if you lost your house and were not insured but you had your income still, then you can get that house back. If you have a house and no income… then you risk losing everything. The cost is small compared to the possible disaster without it.