Mortgage free in 7 years: Guru reveals secrets
A SUNSHINE COAST-based money guru is pushing for a radical rethink of how we approach home ownership.
Money commentator, educator and national newspaper columnist Nicole Pedersen-McKinnon's book How to Get Mortgage Free Like Me became a bestseller on Amazon Books shortly after its launch in January.
Nicole used a clever mix of strategies to pay off her first apartment - a Bondi residence, which she and her husband co-owned with another couple - in just seven years, saving more than $200,000.
The couple scrimped and saved, "quarantined" an entire salary to put into their mortgage, and used a host of other strategies.
They were able to pay cash for their "dream home" in Buderim, where they now live with their two children.
Far from being a brag about her own financial smarts, Nicole's book is an expose of the traps and opportunities of home ownership in the current lending climate and housing market.
She also presents the advice of more than 100 Australian homeowners she interviewed.
"It is so awkward even for me to talk about having paid off my home but I think as Aussies, in a credit squeeze and tighter economic times, we should start to be more proud of how small our debt than how large our house," Nicole said.
"That's what our barbecue conversations should be, because bringing your mortgage freedom date forward even one year saves you a tonne of money and being debt-free changes your life."
Nicole began devising her strategies for mortgage freedom 15 years ago when, as an editor at The Australian Financial Review, she was tasked with researching the "facts, traps and maths of mortgages".
"What I discovered blew me away, about just how much money everyone wastes in interest when you take a loan out and repay over the 25 or 30-year period that the bank wants you to," Nicole told Weekend Magazine.
"I mean, it potentially doubles the cost of your house. It is insane."
About 10 years ago, the interest rate was about 8 per cent, so an average $400,000 mortgage would end up costing $930,000 over a 25-year repayment time frame (that's $530,000 in interest), she said.
"So when people haggle so hard on the price of their property, that's obviously a great thing. "But on the other hand, they are spending so much more over the next 25 or 30 years if they don't just take the mortgage in hand." Today, mortgages have a much lower average interest rate - about 5 per cent from a big-four bank, which Nicole said was still expensive.
"At 5 per cent, you only need to find $702,000 over the life of your loan," Nicole writes in her book. "That's a more than $200,000 difference."
She said people could pay off their debts much faster than lenders wanted them to by using smart, cost-saving measures.
Nicole said the way a person managed their repayments could mean the difference between a life of debt and pressure or financial freedom.
The first step on the good road, she said, was to set a goal for when you wanted to be debt-free.
Nicole advocates for every family to have a "holy s--t fund", which should be roughly six months' salary.
This and all savings, for holidays, for car repairs or for a new car, go into an offset account that is linked to the mortgage, thereby reducing the interest paid over the life of the loan.
"If you can scrounge $30,000, you can do far better than a separate savings account paying paltry interest," she said.
"In an offset account that is linked to your mortgage, that $30,000 is going to save you $66,000 and knock 2.5 years off your mortgage, completely free."
Nicole's passion for this topic came from her own childhood, which motivated her to be debt-free before she had children of her own.
"I grew up in a very wonderful family where there was an investment that turned bad," she said.
"My parents went into debt to buy a coffee shop.
"They were ahead of their time - they were barista trailblazers - and it was way too soon, and it just didn't stick, and they borrowed to do that.
"My childhood was very much shaped by debt and repaying debt, and that was a factor in everything that we did.
"Debt is abhorrent to me and repaying debt was my number-one priority.
"For other people, it might be number one or number two or number three.
"It's just a really personal thing, but for me that's what I needed to feel - free, and to feel like I had options in my life."
But Nicole has identified and personally tested other ways to cleverly milk the mortgage system to save even more loan interest, including the smart use of credit cards, interest-only loans and fixed rates.
Her book gives an example: on a $400,000 loan with a 5 per cent interest rate, an extra $400 per month in repayments would create a saving of $83,686 and get you out of debt in just six years.
But Nicole sounded an important note of caution.
"If you pay off your mortgage into the loan directly, you basically take away all of your flexibility and you also potentially lose some protection," she said.
"First of all, it's in the fine print of loan documentation that if you get into financial trouble, a bank can stop you from taking out redraws."
This is important, because many people deposit their "rainy day money" or emergency funds in their mortgage, because it reduces the interest payable, and assume they will be able to redraw it when they need to.
"However, putting it directly into your mortgage means that it may act like a one-way trapdoor," she said. "If you get into financial strife, a lender is totally within their rights to withhold that money and stop you from redrawing it. So at the very moment that you need it most, it may be locked away from you.
"That's when offset accounts really come into their own."
Her book is not about hard slog but the shortcuts.
"The book is packed full of inspiration," Nicole said.
"For me and for many people, they think their debt is insurmountable, but once you realise how much you can save and that every dollar that you repay extra is a dollar on which you'll never again pay interest, it becomes really motivating."
A couple she interviewed for her book had used what she dubbed the Offset on Steroids strategy.
"One lovely couple where the guy was a mechanic and the woman was at home with their two young children, they were using the bank's money to make a saving on their mortgage interest every single month," she said.
"They put everything they spent on a credit card and sat their salary for the entire month in an offset account."
But a word of warning from Nicole on offset accounts.
"All offset accounts are not created equal," she said. "And there are now lots of fake offset accounts out there. You need to know the questions to ask to know that you've got a good one."
Her book shares strategies from individuals and couples determined to make every buck count.
"There's some wild stuff going on out there," Nicole said.
"People are cutting their costs in really clever, really successful ways. And they're doing it without compromising lifestyle in a lot of cases as well."
From using the time-honoured "envelope system" for budgeting and saving, to making your own laundry detergent, the more than 100 people in her book share their tips in what Nicole terms "stinge-spiration".
The tricks and tips she gathered over a 20-year career in personal finance are presented alongside, to provide a guidebook to help millions of Australians "who would dearly love to be mortgage-free".
It truly was worth the effort, Nicole said.
"I look around at my house, and it's everything that I earned at The Australian Financial Review. It's every dollar. And we live in it. I didn't waste one single dollar. It's incredibly satisfying."
Find more about Nicole Pedersen-McKinnon and her book at www.NicolesSmartMoney.com