- August 3, 2018
- Posted by: Ethica Private Wealth
- Category: Blog
Most people out there would prefer to begin their retirement with no debts and a boat load of savings, but to do so is no easy task. With the average mortgage price being so much higher now than it was a few decades ago, the idea of paying off your mortgage before retirement can feel more like a dream and less like a realistic target.
According to a study by the Australian Bureau of Statistics, the incidence of mortgage debt amongst homeowners aged between 55 and 64 more than tripled between 1990 and 2013, and it has been suggested that this may be causing Australians to push back their retirement and carry on working for longer.
The Australian Broadcasting Corporation (ABC) have shown that the data suggests that those aged 55-64 who haven’t yet retired are 18% more likely to continue working in their retirement years per $100,000 increase in mortgage debt. This means that an Australian in this age range with $500,000 mortgage debt is, on average, 18% more likely to continue working into their retirement years than someone with $400,000 mortgage debt.
The upshot of all this is that, if you plan to begin retirement at 65, with no debts and a property that you own outright, you’ll need to make sure you use effective wealth management and financial planning strategies.
We’ve already written about how debt management is the number 1 wealth management issue affecting most people’s cash flow, so it’s usually a good idea to prioritise clearing as much debt as possible before retirement.
The quicker you clear your debt/mortgage, the less interest you will have to pay out, and the more you can afford to put towards your private retirement savings. With that in mind, here are 4 ways you can clear those debts quicker:
1. Start Making Bi-Weekly Payments
Most people pay their mortgage in equal monthly instalments, but just because this is the most-common payment structure, it doesn’t mean it is the best option available. Switching to bi-weekly payments won’t affect your budget as you’ll be paying half of what you’d pay every month per 2 weeks. For example, if you pay $700 AUD per month, you’d be paying $350 per 2 weeks.
So how does this help you to pay off your mortgage quicker then? Well, even though it feels like you’re paying the same amount per month and therefore isn’t likely to affect your budget or feel unaffordable, you’re actually paying slightly more across the year. This is because there are 28 days in 4 weeks but up to 31 in a month. Therefore, you actually pay 13 months’ worth of payments in a year as opposed to 12.
That extra monthly payment might not seem like much, but over the years it really adds up. As a representative example of this, let’s assume that you have a 30-year mortgage to the value of $200,000, with a 5% interest rate. If you paid this biweekly instead of monthly, you’d clear your mortgage debt 5 years early and save over $34,000 in interest.
2. Round Up Your Payments
Monthly mortgage repayments are often calculated based on percentages and don’t always work out at well-rounded figures. This means that many people have a monthly repayment sum that looks something like $432.06, as opposed to a nice even $450.00.
When you’re doing financial planning activities like monthly budgeting, the chances are that you probably already round this figure up or down in order to simplify your calculations. You might have rounded it to $430, or up to $440 or even $450.
Seeing as you’re rounding anyway, try to round the figure up as much as possible. Then, use the excess to make extra principal payments against your mortgage. This will help you to clear it that much quicker. Again, the excess amount – in this example, $17.94 – might not seem like much, but it adds up over the years. In our example, rounding up to $450 adds up to an extra $6458 over 30 years – that’s enough to allow you to pay it off more than a year early.
Whilst this might not be a suitable option for everyone, refinancing your mortgage into a shorter-term loan can be a great decision. The shorter the repayment term for your loan, the lower the interest rates tend to be.
This means that the monthly repayments might not be as high as you think. Even though you’re repaying your mortgage in half the time, it’s unlikely to be double the cost as you’ll have knocked a huge chunk of interest off the overall value, thus saving you a lot of money in the long run.
This may be unaffordable for some and it’s advisable to consult a financial planner before deciding whether this is an appropriate strategy for you.
4. Make Good Use of Unexpected Cash
When financially planning, many people only account for incomes that they can count on. They often don’t incorporate things like bonuses, cash gifts, winnings or money from selling old possessions. Therefore, this money is usually totally free to use in whatever way you choose.
If you choose to spend this wisely and put it towards your mortgage repayments, you may be able to make significant savings on interest rates by paying it off quicker – you might even be able to shave a few years off your mortgage.
If we estimate that the average-joe will receive around $500 AUD per year in unexpected cash from things like garage sales, gifts and work bonuses, that’s a potential for an extra $15,000 AUD in mortgage repayments over a 30-year period.
What Else Can I Do?
The above financial planning strategies might not be right for everyone, and there may be other ways for you to manage your wealth more effectively and put more towards retirement.
Ethica’s team of financial advisors may be able to help you to explore your options and find solutions that work for your personal circumstances. Get in touch with us to set up your free appointment.