Mortgage apathy: Financial cyanide

“Is it ignorance or apathy? Hey, I don’t know and I don’t care”

Jimmy Buffett

We were out riding the hills of far away places with mates. Between sucking in oxygen we talked about life in a single income family. One of my riding buddies is just having his first which means that his wife will be on maternity leave for 12 months.

It is interesting because they are spenders. I’d always assumed his wife must be on very good money because I’ve worked with him at a number of different companies and so I am certain he is on a good, but not great salary.

Last year they bought their first house. A five bedroom place in a very good street. Probably in a neighbourhood where you wouldn’t get much change out of $750,000 for a house like his. They immediately added a $50,000 deck, $25,000 of new carpets and then went off on two international holidays. Upon returning they installed a superb surround sound system and a massive plasma flat screen. Needless to say I like to visit.

So with all this spending I just figured that their joint income must be pretty good, but I also wondered what would happen when they had kids, especially if they were buying some of this stuff on hire purchase.  Anyway turns out they probably weren’t on a massive double income. Their mortgage was so big and it seemed like it was so futile to them that they were extending it to buy all this stuff and take expensive holidays.

One of the other guys in the group is a bigwig company director. He’s likely on around $500,000 a year, but he still wears his old high school rain jacket out riding (pretty much everywhere actually). We are on vastly different incomes, but we share a pretty similar approach to life. Hence the long friendship. I‘ve written a bit about him before. Anyway I thought he was going to have an unhim moment and slap our otherfriend for being so stupid with his money.

With any mortgage you might pay say $1300 every fortnight or $34,000 per year. When most of that payment is interest the results can be quite depressing. In a single year for $30k in you might only reduce your debt by $5000! So you start to think that borrowing another $100,000 for toys would only make that payment $1500 instead of $1300. To most people this sounds like a good plan.

This is what I call mortgage apathy.

It all comes crashing down when $1500 become ¾ of your family income. Like if you lose a job, you get sick, you have a kid or you retire. Worst case your house gets sold by the bank you end up homeless, but you still owe the bank money on top of rent.

The normal payback period for a mortgage is 30 years. The average life for the flat screen (mostly due to planned obsolescence) is two years. Makes no sense at all to be paying that TV off over 30 years as part of your mortgage.

What does make sense is to have the tiniest mortgage you can afford.

Be as aggressive as you can in paying it back.

Pay as much off as early as possible.

Set payback targets.

Celebrate like your team won the super bowl when you exceed your milestones!

Make charts that your kids can colour in as you destroy the debt.

Figure out what proportion of your home you actually own and how much is the banks. When you start out you may only own the curtains. Three years later you own the kitchen. Realise this is what you are buying with your paycheck. You are buying the bedroom that you sleep in. The bathtub and the drywall in your child’s room.

The key is to become as excited about being debt free as you are about a new couch, a playstation or a holiday to the Carribbean.

 

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