FOOL'S EYE VIEW
Pay Off Your Mortgage In Five Years

By Cliff D'Arcy
January 27, 2005

The UK's mortgage debt has doubled in less than seven years.

At the end of February 1998, UK homeowners owed £434 billion to mortgage lenders. As at the end of November 2004, we owed over £867 billion. In other words, we managed to double our biggest burden in less than seven years.

With around 11.8 million mortgages between us, the average mortgage debt is currently around £73,000. However, this average is distorted by larger (six-and seven-figure) mortgages, mainly held by homeowners in London and the South East. In reality, most British borrowers have a mortgage much less than this figure.

The majority of homeowners are content to pay back their home loans over the typical 25-year life of a mortgage. Over the last twenty-five years, during which interest rates averaged roughly 10%, borrowers with repayment mortgages paid back around £273 for every £100 that they borrowed. Interest-only mortgage customers paid back something like £350 for every £100 borrowed. That's an absolute mountain of interest!

But it doesn't have to be this way, because you can murder a £73,000 mortgage in just five years. However, this approach isn't for the faint-hearted, because it involves commitment, dedication and plenty of hard work! Still, it's worth swapping no more than five years of effort for an extra twenty years of freedom, don't you agree?

Our daily target is...£32

Begin your five-year plan to massacre your mortgage by breaking down this huge task into smaller chunks. (Business gurus call this "eating the elephant in small bites".)

To pay off a repayment mortgage of £73,000 with an annual interest rate of, say, 6% would normally take 300 repayments of £470. To pay it off in just five years, the monthly repayment leaps to £1,411. So, in this example, you need to boost your monthly repayment by £941. This works out at £32 a day.

Let's begin "Operation £32" without delay. Your mission, should you wish to accept it, is to raise money, shovel it into your mortgage and repeat until your debt is cleared!

Starting the war

Before we start looking for ways to raise this extra cash, we need to set up a system to manage this flood of extra cash. First, check with your mortgage lender that you can make overpayments without being penalised.

If you have a reduced-rate deal, you may find that you can only overpay a tenth (10%) of your mortgage each year without paying penalties. If so, save any surplus overpayments over this 10% ceiling into a high-interest savings account. After your lock-in ends, you can chuck it all into your mortgage in one go.

Second, if you have a daily interest mortgage, which millions of borrowers do, any money that you deposit in your mortgage account gets knocked off the total as soon as it clears the banking system.

However, if you have a rotten "annual interest" loan, your repayments don't reduce your debt until the end of the year. In spite of this, you may find that your lender will accept immediate "capital repayments" above a certain threshold, typically, £500. Make sure you tell it that your £500 or so is a capital repayment. Otherwise, your money will be in limbo until the end of the year.

Make sure that you've noted down the sort code and account number of your mortgage account. Armed with these, you can pay money into your account over the counter, or send automated or one-off payments to your account via the banking payments system, BACS. These two numbers will be your closest allies for the next sixty months! Also, get friendly with the staff at your lender's local branch, because you may see a lot of them in future!

Be fast and furious

The name of the game is raising money fast and getting it into your mortgage account without delay. Don't let your money hang around: if you're really manic, you could deposit it every day, but once a week should satisfy most players. Remember that the "mortgage massacre" is a guerrilla war – you need to raise what you need, get it in your mortgage account and then get out!

One easy trick to get you started is to increase your mortgage repayment permanently. In the above example, your old monthly repayment was £470. Let's increase this here and now by, say, £96, to £566. That's three times £32 under our belt straight away!

Be an accountant: think income, expenses and assets

You have three weapons to wipe out your mortgage: your income, your expenses and your assets. The trick is to boost the first, slash the second and sell some of the third. Absolutely everything is up for grabs in Operation £32!

Lower your expenses

Begin by slashing your expenses to the bone: check out these 25 Quick Money-Saving Tips. However, only you know where your money goes, so start a spending diary to see where you can cut back. Some people track every penny they spend, whether by cash, cheque, credit or debit card, Direct Debit or standing order.

Also, perhaps an extreme budgeting challenge would work for you? It certainly has for me: so far in 2005, I've withdrawn £20 in cash, and spent just short of a tenner on my debit card and the same on my credit card!

One of the biggest expenses to tackle is your mortgage itself. A lower interest rate – from your current lender or from switching to another lender – could save you, say, £1,600 a year. That's fifty times £32 in the bag! Giving up smoking is another big financial plus: ditching a twenty-a-day habit is worth 55 times £32!

Here are some other gains:

Savings on everyday expenses
Annual saving	Number of £32 days
Stop a £20-a-week takeaway habit (£1,040)	32
Find cheaper life, health, motor, car and travel insurance (£1,000)	31
Become a teetotaller (£1,000)	31
Take lunch to work (£960)	30
Stop playing the Lottery (£6 a week = £312)	9
Switch phone, mobile and Internet tariffs or providers (£300)	9
Cancel premium satellite channels (£300)	9
Cancel gym membership (£300)	9
Switch gas and electricity suppliers and be more energy efficient (£215)	7
Pay bills by Direct Debit (£170)	5
Stop buying newspapers (£160)	5
Switch bank account (£65)	2

Feel free to "pick and mix", because this isn't "all or nothing" approach. Just do what works for you!

Increase your income

There are loads of ways to do this. How about a part-time waiting or bar job? Three hours an evening, three times a week at £5 an hour should mean take-home pay of at least £32. Alternatively, you could easily earn £32 a day working at the weekend, for example, by showing people around homes for a local estate agent.

If you get on well with people, why not take in a lodger? This could earn you an extra tax-free £4,250 a year, which is almost 133 times £32 – more than a third of your annual target in one go! Alternatively, you could boost your income by paying less tax and claiming all the State benefits that you are entitled to.

Sell what you don't need

Everything apart from your home itself is up for grabs in this round! Ask yourself: is having a car more important than being mortgage-free? Running a car costs over £100 a week on average (that's three days a week taken care of). Could you live without your runabout for a while, or sell it and buy a cheaper vehicle?

Whatever you can live without can be flogged to the highest bidder, either in car boot sales, ads in the local papers, eBay, Amazon Marketplace or wherever. Items up for sale could include books, CDs, clothes, computers and software, DVDs, electrical equipment, jewellery, magazines, records, toys, videos. It's a bit like a house-clearance sale – anything that's not nailed down is on the line!

Also, throw any spare cash you have at your mortgage. You stand to gain more by using your savings to reduce your mortgage, because you'll avoid paying tax and "earn" a higher rate of interest. Just remember to put some cash to one side for emergencies.

Go at your own pace

Of course, you may find the fast lane to mortgage freedom a little extreme for your tastes. In which case, take it at your own speed. It can be done in five years or even less, but it's up to you to decide how radical you want to be. But, whatever you do, don't carry that mortgage millstone around your neck for the full 25 years. You'll get very tired of lugging it around!

Well, what are you waiting for? You've got £32 to find by the end of the day. Off you go!

Checklist

Cut the cost of your mortgage, insurance, fuel bills, credit card and bank account.