Many people are resigned to carrying the burden of their home loan for close to the full 30-year term. However, there is an alternative that could help you pay it off in a third of that time – or even faster – with no extra loan payments.
Of course, banks often tell homeowners that if they make extra loan repayments they may be able to pay off their mortgage a few years earlier than planned, which is good, however, there is a better and faster way – and there’s no smoke or mirrors.
How does it work?
Using the equity in your home, you borrow enough money to invest in a positive cash flow property and pay the costs such as stamp duty etc. That property grows at about 7 per cent per annum and is $100 – $400 positive cash flow per week. The positive cash flow helps pay off your mortgage, and after roughly seven to ten years of growth, you sell the investment property and pay off the rest of your mortgage, or at least a considerable chunk of it. Done – and all without any extra loan repayments!
If you have enough borrowing capacity and cash or equity, you may be able to invest in more than one property safely, which may help you build equity even faster to pay your home loan off sooner.
Most capital city property markets have averaged close to 9 per cent growth per annum over the past 60 years, however, they have a cycle, where the market typically booms for about 7 years with close to 100 per cent growth, but then sits flat for about 7 years with almost no growth while rental returns and affordability slowly recovers. Most of these markets are in different stages of their cycle, where some like Sydney have just finished a boom and will now have poor growth for about 7 years with low rental returns and affordability. Brisbane, Canberra and Adelaide booms are however just beginning, and they have net rental returns 50 – 100 per cent higher than Sydney.
These three markets are expected to have 60 – 100 per cent more growth than Sydney over the next 7 – 10 years, while having 50 – 100 per cent higher rental returns. So, for $1,000,000 of invested property, it is likely to be $800,000 to $1,200,000 in higher total growth and rental returns!
Once your home is paid off or significantly reduced, you could invest further to build an investment portfolio to retire with.
Manage your risks
This property strategy, of course, requires carrying more debt in the short term, which can, in turn, mean more risk. So you need to be comfortable with the repayments and understand how to handle any risks.
While a positive cash flow property will usually leave you with no additional contributions, if interest rates increase quicker than rental returns, or there’s more vacancy or unforeseen costs, you should be prepared to make additional repayments.
Seek professional advice if you are considering this approach and implement other risk-management tactics, such as borrowing extra cash as a buffer; ensuring you have adequate income protection and life insurance, and using the best property research available to find the right investment areas and the right price.
Do this and you should be on track to quickly pay off your home – and live a better life than you thought was previously achievable.