Up until a few years ago, I was sure I’d be a renter for life. But when my babies were born I wanted to give them a solid home environment and not need to move whenever my landlord decided to make changes. With that in mind, we decided to buy an affordable starter house while we were still renting overseas.
We’ve since downsized from that house and continue to rent it out to tenants. We moved into a smaller property we own in a much better location and so far it’s proving to be one of the smartest decisions we’ve ever made.
A mortgage-free house provides options and financial security, not to mention a consistent home environment for my boys. Owning a home doesn’t stop us from travelling extensively, in fact, it is enabling us to travel to new, more expensive destinations (more on how further down the post). That said, the monthly mortgage payment needs to be paid each month and that’s money we could use to pump up our travel fund.
Update: February 2018. We are just one payment away from a paid off house. Getting to this stage has been a culmination of a lot of different efforts including selling a rental property, saving like crazy people and, of course, downsizing to have a smaller mortgage.
We purchased our place for $195,000 in 2013. It was worth around $220,000 when we purchased (you make your money when you buy) and is probably somewhere around the $260,000-$280-000 mark now with the renovations we’ve done.
We wanted a paid off house by 40 and we have achieved this at 38 and 35.
Here’s why we wanted a paid off home even though we are planning a life of travel.
Your payments end eventually
Once you’ve paid off your mortgage you can live in your house for life with just the cost of insurance and property taxes, plus maintenance. The problem with renting is rent never ends. Rents continue to increase as life goes on, whereas the interest portion of your mortgage will reduce as you pay back the principal. The reason many people decide that ownership is not for them is due to the huge amount of interest you pay if you take a mortgage on a long-term loan. We intend to pay the mortgage back early so our interest cost is minimised.
You can leverage home equity into rental property
Another reason we like to own our own property is that we can use the equity in a home mortgage to leverage into rental properties. Right now we could take over $150,000 in loans to buy a bunch of new properties. We don’t plan to, but it’s nice to have the option.
You can put a nail in the wall – or remove a wall
I cannot overstate how lovely it feels to be able to decorate a space to your own tastes. You can hang a picture on an actual hook or renovate without worrying about landlords taking make-good money out of your deposit.
How demeaning are property inspections? I have always hated them, but as a landlord, I understand why they are necessary. Here’s one of many problems that just disappear when you become a homeowner.
Your home gives you travel options
Another benefit of owning your own home is that you can house swap with other homeowners around the world when traveling. I recently made a post in a Facebook group for world schooling families asking if anyone would be interested in swapping our house in Christchurch, New Zealand for somewhere overseas. I got responses for homes in Hawaii, Alabama and Los Angeles. For the price of my own mortgage, I can access some very expensive destinations in the world.
If we want to travel for a longer term, we can put our belongings into storage and rent our house to tenants. Or we can rent it as a short-term vacation rental when we travel. Options, people!
If everything goes to shit, you still have a roof over your head
You know, life. It happens. Jobs get lost, incomes drop. If you own your home (or a significant part of it) you can likely ride out a financial shit-storm by reducing your repayments back to interest only, or even by taking a repayment holiday if you have enough equity built up.
The house is paid off, now what?
So, we’re all convinced that paying back a mortgage is a good idea. The only problem is, what comes after. Can you believe one of the most common ways people find this article is by typing into Google ‘paid off house now what ‘?
I can, because a mortgage is such a massive figure that most people don’t expect to pay it back early. Living mortgage free is not something people talk about. Banks and financial institutions don’t prepare us for life after a mortgage is paid off.
In fact, one of the reasons I’ve dragged my feet about making our final payment is that for a long time I wasn’t sure what to do when the house is paid off – so you’re not alone.
Making a plan for what to do with the mortgage payment each month after getting our house paid off is something I’ve put a lot of thought into and I think I’ve finally come up with a plan.
Here’s what we’re doing with our money when the house is paid off.
1. Celebrate (and educating)
Celebrate your achievement! You paid off your home. Throw a party. Go out for dinner or take a weekend away somewhere new. Recognise your achievement and spend a little money if you want to – which can be hard if you’ve been ultra-frugal in order to pay back debt.
Our plan is to spend March’s mortgage repayment on an Easter getaway. I am very excited about this because it’s a tangible way to show our kids that hard work and frugality can lead to something better. We’ll make sure to talk frequently about how we are paying for our fun family trip, and that it was because of the sacrifices we made when paying off debt.
2. Payback other debt
If you have other debt, it’s likely to be at a higher interest rate than your mortgage. Paying back consumer debt or student loans can be a good use of your money. Depending on the amounts owing and your own comfort levels, you could choose to pay 50% of your mortgage payment towards other debt, and 50% towards growing a nest egg. I’m a big fan of saving money while you are paying back debt. The exception is if you own a rental property.
We have a mortgage on our rental property, but we will not be paying that back early. My real estate investment strategy is to have my tenants pay my debt in the form of the rent they pay, plus in New Zealand, we have tax benefits for investment property debt. It’s not worth our while to pay back the loan on our investment property, as we still have a lot of years paying tax as regular wage earners. When it comes time to retire, however, we will reconsider.
3. Save some
If you are wiping out a chunk of your financial commitments by paying off your mortgage, then you should be able to save some, or all, if you have no other debts to pay.
From April onwards we’ll be directing our mortgage payment in its entirety towards our early retirement fund. Life after paying off the mortgage will not look so different when it comes to our day-to-day finances as we’ll still be earning the same amount. So it makes sense that we say no to lifestyle inflation and use the money to build our wealth.
Our early retirement fund is currently held in a low-fee fund (Simplicity Growth here in New Zealand) which invests in Vanguard Index Funds.
4. Max out retirement accounts
Depending on where you’re at in your financial journey, you might have a few years of regular income left. If you receive a government or employer match for your retirement funds, putting some of your mortgage payment towards maximizing those benefits is a really smart move.
Once your house is paid off, the options for what to do with your money are seemingly endless. One thing’s for sure though, no matter what you do next, you’ll always own the roof over your head. Ain’t no better feeling.