Don’t let a mortgage limit your life choices
About 20 years ago I had a chance to move and work abroad with a very unexpected last minute opportunity. I didn’t take it, primarily because I had just taken a mortgage on a small place that was going to be my first home whist I started my working career in the U.K.
I don’t regret not taking the opportunity (and on reflection it was probably the better choice as it allowed me to focus on building a stronger career base, but that’s not the point of this article!)
I remember being angry that my life choices were limited by a large and difficult to unpick financial arrangement. Flexibility is something I never even considered as I signed up to the commitment, it was just the ‘adult’ thing to do. The privilege of home ownership has this one massive downside. A lack of flexibility.
Fast forward 20 years or so and I’m mid career with a larger mortgage on a family home. And I can’t help but feel that nagging feeling, itching away at the back of my mind again. I don’t want to be forced to limit choices just because of a mortgage.
So I’m changing the rules. I define my circumstances and choices. I’m buying back my time by not having to work the career with the best pay check.
There’s been a lot of talk recently about two areas related to this goal. FIRE and Minimalism.
FIRE — Financial Independence, Retire Early. A lifestyle movement focussing on frugal living now to allow you to retire much early than a traditional retirement age.
Minimalism — Ensuring you know what’s important to you and cutting out all the other superfluous stuff. Google Joshua Fields Millburn and Ryan Nicodemus to learn more.
What’s on my mind is a mixture of elements from both of these topics. I don’t want to retire early, I want flexibility of my time. I want to choose work on my terms, not driven by a minimum required income. And I want to spend my time on the things I know are important to me.
One way to do this is by making loads of money! By having your pick of any job out there to maximise your income. In the book “So good they can’t ignore you” by Cal Newport there is a story about a programmer getting the best work with the best contract because they ensured that they were the best in the market.
But I may not get there. I may not be that type of person. I want to be able to take the most exciting, energising and meaningful work (for me) because I can afford to take it, however little it pays.
Here’s how I’m doing it. By tackling the 2 biggest costs in my life. Car ownership and my home mortgage.
The first is straight forward so I’ll make this quick. Don’t buy a vehicle unless you have to. And if you need to (like I do), buy quality second hand and with the goal of long term investment. Sweat that asset to make it pay for itself many times over for as long as you possibly can. As long as it’s safe, it doesn’t matter what it looks like. Save your money.
The second isn’t harder but the sums involved are scary and timescales daunting. But time is on your side here if you use it to your advantage.
Every pay rise I get, I overpay the full additional income into my mortgage from that point forward.
i.e. If my minimum mortgage payment is £1000 per month. Assuming I earn £40k per year or £3,333 per month. (Note: your tax rate will impact this but for simplicity, lets just do it without the extra math to explain the concept)
Year x — 3% Salary rise so I now pay £1100 (my 3% rise equates to £100 a month) = 10% overpayment
Year y — 2% Salary rise so I now pay £1168 (my 2% rise equates to £68 per month = 16.8% overpayment
Year z — 10% Rise from a work promotion so I now pay £1,518 (my 10% rise equates to £350 per month) = 51.8% overpayment
You can see that very quickly your overpayment grows cumulatively as it is added on top of the previous overpayment. Since mortgage payments tend to be quite stable (or at least predictable) over the life of the product, any additional income is truely additional to the one largest outgoing and therefore within your power to choose where to put it.
This approach has two real financial benefits. You reduce the capital borrowed at any point in time and therefore the interest being charged going forward. In the same way that compound interest works for you in your savings, it also helps to reduce your mortgage amount massively by overpaying. It also simply means that the total capital owed drops quicker than just paying the minimum amount, shortening the term of the mortgage.
However my cost of living outgoings increase each year, isn’t that what my annual rise is for?
That’s the challenge. To keep your current outgoings fixed at the today’s total; or looking at it another way, to reduce your ongoing expenditure by the same amount as the rise of the cost of living where you live. This plays to the idea of Minimalism mentioned earlier. What can I do without, that maybe I had last year?
Subscription costs getting too high? Drop one of your subscriptions. Eating out getting more expensive? Go out less often or pick a smaller local option that isn’t quite so expensive (you never know what unique new experience you might have).
And that’s the trick. Nothing more complicated than that. I just keep adding my incremental income into mortgage overpayments.
At the end of the day, this really isn’t a finance article. Its an article about positive intent, stretch goals and deliberate choices. Aim High, Fail High as someone once said to me. Even if I miss one overpayment, or can’t quite make all the contributions I’d like due to emergency bills, I’m still so much closer to financial and career freedom than last month. It adds up much quicker than I expected, I only wish I had started this earlier.
Please note, this is not financial advice. Everyone is responsible for their own financial situation and the arrangements they choose to make. This is simply how I am approaching mine.