In the habit of ‘whacking it on the mortgage’? Start treating it like any other debt (and get ahead)
Need a new kitchen? Fancy that round the world trip? Just whack it on the mortgage.
In 21st century New Zealand we extend the mortgage every time we have a bit of ‘spare equity’ built up. It’s like we’ve inverted the whole concept of borrowing and the aim of paying it off has disappeared out the window.
If you don’t pay that mortgage down as you would other debt, you could be forced to work until you drop just to pay the mortgage instead of retiring at 65 or 70.
If this is you, stop in your tracks. Before you extend the mortgage again to magic away your credit card debt, new car, kitchen, bathroom, holiday or even a new 3D TV, ask yourself some honest questions.
Honest question 1
Does that kitchen, bathroom or extension really add value to your home? We tell ourselves we’re ‘investing’ in a new kitchen, but we’re really buying a new kitchen because we want one. Have you ever seen anyone in an ‘Italian’ kitchen and bathroom shop with their spreadsheet to find out which kitchen bench would have the best return on investment? No they’re buying the bench of their dreams. What’s more, by the time they sell, that new kitchen will be well used.
Honest question 2
Does everyone really pay for their holidays on tick? No. Some people save up and pay up front for holidays. Slipped onto a standard principal and interest mortgage at 6 per cent, that $10,000 holiday snowballs into $19,329 over 25 years. That’s almost double the cost of the holiday.
Honest question 3
Is it really cheaper to put the car on the mortgage? It would be if the loan for the car were paid off in five years. The trouble is that typically Kiwis add the car to the mortgage without doing the maths. Just like the holiday, a $10,000 car will cost you $19,329 over a 25-year term. It’s actually cheaper on a 12.99 per cent car loan paid off over five years. If you do that you’ll only pay a total of $13,649. If you do put it your ‘new’ car on the mortgage make sure the term for that part of the loan is just five years. Or here’s a radical thought: buy a banger for cash or keep your existing car.
Honest question 4
Will this really clear the credit card debt or making it easier to spend more? Sweeping the credit card debt onto the mortgage (aka debt consolidation) is sometimes sold to Kiwis as the panacea for our financial woes. If you can’t control your credit card spend, however, and aren’t willing to cut the card up, you’ll almost certainly end up in the doo-doo all over again and will slowly ratchet up your mortgage debt every few years.
Honest question 5
Am I really cut out to be a landlord? Extending the mortgage to buy a rental property or business is in theory a better financial decision than buying consumer goods such as kitchens, paying off the credit card, and blah-de-blah-de-blah. Good rental investments can make money. They can also be the ruin of you financially if the downturn comes just after you’ve bought or you’re beset by a host of other fish hooks. If you go in with your eyes open and the sums done that’s fine. Otherwise skip this step.
The antidote: paying down the mortgage
Whacking your spending and credit card debt on the mortgage is like dressing up in the Emperor’s New Clothes. Everyone can see that you’re naked except you because you’ve fooled yourself into thinking the spare equity in your mortgage is real wealth.
The reality is that life is a lot less stressful with a smaller mortgage noose around your neck. And if something comes along to trip you up such as illness, accident or divorce, you’ll be in a far better financial state to weather the storm.
You could treat that ‘spare equity’ as your retirement fund. Plenty of Kiwis who pay off their mortgages can move into a smaller home or cheaper location once they retire and live off the leftover equity.
So here’s the antidote. Treat your mortgage like you should do your other debt. Look for ways to pay it down – even one dollar at a time. Learn about the needs versus wants trap. Then track, trim and target. Finally fatten up your finances with the Three Naughty Things rule.
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