How to Pay Off Your Mortgage in 10 Years or Less

Pay off your mortgage 3 times faster.

In Australia, they've developed a banking system that allows people to pay off their debts much faster than most Americans are able to. Learn how to simulate it.

Things You'll Need

• 2 credit cards or lines of credit.
• A checking account
• A mortgage

Instructions

1. The Australian Banking System

   In Australia, most people do not have multiple bank/credit accounts like Americans do. Instead, all of their finances are run through one master account that takes care of everything. This includes checking accounts, mortgages, credit cards, etc.

   Combining all of these accounts does two beneficial things:
   1. It simplifies accounting.
   2. It allows debts to be paid down much more quickly.

   This article will teach you how you can create a similar system using your traditional American accounts.

2. How it Works

   So how does the Australian system allow for quick debt repayment? To put it simply, the system puts your idle money to work.

   If you're like most Americans, you get a paycheck every two weeks and deposit it directly to your checking account. Once it's there, the money sits idly by until you spend it - earning 0% interest.

   This process will show you how to take that idle money in your checking account and use it to save tens of thousands of dollars in mortgage interest.

   The next two steps will compare the traditional Australian banking method to the American method.

3. The Australian Method (Simplified)

   For this example, and the following American Example, assume these variables:

   Monthly Income: $4,000
   Beginning Monthly Interest (Includes Mortgage): $667
   Other Monthly Expenses: $2,000
   ---------------------------------------
   Remaining Mortgage Balance: $100,000
   Interest Rate: 8%
   ---------------------------------------

   Now, let's walk through a few months of transactions and see what happens to the account. Remember, using the Australian system, there's only one account.

   Beginning Balance - $100,000

   Month 1
   Paycheck Deposit: $4,000 = New balance = $96,000
   Monthly Interest (Includes Mortgage): $667 = New balance = $96,667
   Expenses: $2,000 = New balance = $98,667

   Month 2
   Paycheck Deposit: $4,000 = New balance = $94,667
   Monthly Interest (Includes Mortgage): $658 = New balance = $95,325
   Expenses: $2,000 = New balance = $97,325

   Month 3
   Paycheck Deposit: $4,000 = New balance = $93,325
   Monthly Interest (Includes Mortgage): $640 = New balance = $93,965
   Expenses: $2,000 = New balance = $95,965

   After 3 months, the account balance has been paid down over $4,000. Now, let's look at the American method.

4. The American Method (Simplified)

   Variables:

   Monthly Income: $4,000
   Monthly Mortgage: $1,000
   Other Monthly Expenses: $2,000
   ---------------------------------------
   Remaining Mortgage Balance: $100,000
   Interest Rate: 8%
   ---------------------------------------

   Now, let's walk through a few months of transactions and see what happens to these accounts. Remember, using the American system, there are multiple accounts, and mortgage are handled differently in America.

   Beginning Balances
   -----------------------------
   Mortgage Balance - $100,000
   Checking - $0
   -----------------------------

   Month 1 - Checking
   Paycheck Deposit: $4,000 = New balance = $4,000
   Mortgage Payment: $735 = New balance = $3,265
   Expenses: $2,000 = New balance = $1,265

   Month 1 - Mortgage
   Beginning Balance: $100,000
   Interest Payment: $667
   Principle Payment: $68
   Ending Balance: $99,932

   ----------------------------

   Month 2 - Checking
   Beginning Balance: $1,265
   Paycheck Deposit: $4,000 = New balance = $5,265
   Mortgage Payment: $735 = New balance = $4,530
   Expenses: $2,000 = New balance = $2,530

   Month 2 - Mortgage
   Beginning Balance: $99,932
   Interest Payment: $666
   Principle Payment: $69
   Ending Balance: $99,863

   ----------------------------

   Month 3 - Checking
   Beginning Balance: $2,530
   Paycheck Deposit: $4,000 = New balance = $6,530
   Mortgage Payment: $735 = New balance = $5,795
   Expenses: $2,000 = New balance = $3,795

   Month 3 - Mortgage
   Beginning Balance: $99,863
   Interest Payment: $665
   Principle Payment: $70
   Ending Balance: $99,793

   Total Accounts: $99,793 + $3,795 = $95,998

   After 3 months, the account balances have improved about $4,000, but the balance is a bit higher than the Australian account.

5. Though not impressive after 3 months, the Australian method gets much better over time. Using the current scenario, the Australian account balance will be paid down to zero in only 3.5 years because of compound interest.

   The U.S. method on the other hand will take over 6 years, assuming every extra dollar in the checking account is saved up and used to pay off the mortgage (which most people find very difficult to do). If you only make the required mortgage payment, the payoff is 30 years.

   The difference between the two lies in the way that U.S. banks encourage you to use your accounts and how they compute interest. A U.S. mortgage requires you to pay the same monthly payment, no matter how much you owe. Notice that the mortgage payment was $735 every month.

   An Australian account charges interest only on the current account balance, thus allowing your payment to decrease every month as you pay down the balance. Notice the interest payment decreasing over time.

6. Setting it up.

   Now that you know how it works, let's learn how to simulate the Australian system using your current accounts. You'll be working with 4 accounts:

   1. Checking
   2. Credit Card
   3. Line of Credit
   4. Mortgage

7. Setup Step 1

   Every three months, you're going to transfer a specific amount from your line of credit account to your mortgage. Essentially, you are just transferring your balance from once account to the other.

   So, say you take $10,000 from your line of credit and pay down your mortgage, you would now have a $10,000 debt in your line of credit, but $10,000 less in your mortgage.

   You now have a mini Australian account. It's a line of credit that you can make payments to, and withdraw from whenever you want. You have to create this account because your regular mortgage will not allow withdrawals.

8. Setup Step 2

   When you get paid, immediately transfer your money to your line of credit account. Remember, we don't want that money sitting in your checking account doing nothing. Get it out and use it to offset your line of credit's debt and interest rate.

9. Setup Step 3

   Start using your credit card for all possible monthly expenses. You'll pay it off each month, but using it is a necessary part of the system.

   Our goal is to get the lazy money out of our checking account, and use it. This means you can no longer write checks. So, when you pay bills, go shopping, or buy anything else you will now put it on your credit card. Not only will you pay zero interest for at least 30 days on these charges, but you'll earn some points or sky miles at the same time.

10. Setup Step 4

    If possible, setup an automatic recurring payment from your line of credit to your credit card to pay the balance in full on the due date. This allows you to automate your banking, so the system requires less management.

11. Your done. Once your have the system setup, you can watch as your debt vanishes quicker than you'd ever imagined possible.

Tips & Warnings

• Be diligent in budgeting. The lower your monthly expenses, the faster the system can pay off your house.

• If you already have other debts, you will need to pay them off before starting on your mortgage. The same system applies.