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.
Owning a home is the great Australian dream, but many of us discover that trying to pay off our mortgage is a nightmare.
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.
This is how it works. Your investment in another property that grows at about 7 percent per annum and switches your loan from principal and interest repayments to interest-only repayments. Then you use the reduction in monthly loan repayments to cover the holding costs of the investment property. The difference between interest-only, and principal and interest payments, is usually very close to the holding costs of an investment property after receiving rent and associated tax deductions.
After seven to ten odd years, you sell the investment property and pay off your mortgage, or at least a considerable chunk of it. Done – and all without any extra loan repayments!
Do the numbers …
Let’s run some figures as an example. Suppose you have a $500,000 home loan on a 30-year term at 4 percent interest. The principal and interest repayment are $2,387 per month (or $551 per week). The interest-only repayment is $1,666 per month (or $384 per week). The difference is, therefore, $167 per week, which is more than the weekly cost of the investment property.
So how do you pay off the home loan if you switch to an interest-only loan? Simple. By holding the investment property until it increases in value to slightly more than double, selling it and then paying off the home loan with the proceeds.
Under this scenario, many property investors can pay off their home in a decade, or it could be quicker. At 7.2 per cent growth for a property, it takes 10 years to double in value. Bear in mind that the Sydney market has averaged annual growth of 9.3 per cent over the past 60 years. So a fast mortgage payment is realistic. Indeed, if the circumstances are right and you have enough borrowing capacity to safely purchase two investment properties, or one now and another in a year or more, you could sell them after about five odd years and pay off your home loan sooner. Once your home is paid off or significantly reduced, you could invest further to build an investment portfolio to retire with.
As mentioned, these scenarios are based on making no extra home loan repayments, but if you are also able to make any extra repayments, the outcome improves even further and is still highly recommended.
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.
Seek professional advice if you are considering this approach and implement other risk-management tactics, such as borrowing more money than you need for the property purchases and using the 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 living a better life than you thought was previously achievable!
This article was originally written by Richard Sheppard for the August 2016 edition of Peninsula Living Magazine.