Are You a Slave to Your Mortgage?

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Taking out a mortgage is one of the deadliest financial decisions you can make. We are currently paying back a mortgage, so I am all too aware of the implications of this financial trap.

We jumped in, not because it made more financial sense than renting, but because we wanted our own place. We wanted to paint the walls, put up pictures, change the carpet, and call the place our own!

What we did not realise at the time was that we were conditioned to think this way and to ignore any financial common sense. But we have realised our mistake and are changing our mindset.

Hopefully, this post will make you think twice before signing your life savings away, borrowing money for that ‘dream house’ that all banks want you to buy. If you haven’t read my post on compound interest, make sure you have a look at that first. If you have read it, you will know that getting a mortgage puts you on the wrong side of the interest equation and will cost you more than you first think!

The Masters

There is a lot of social pressure for people to buy a house. Friends will ask you when you’re going to get onto the property ladder and gush about their beautiful new home.

At the same time, property construction and sales agencies design increasingly sophisticated houses, with many modern and convenient features, and use lavish descriptors to build and sell ‘dream homes’.

Governments provide tax incentives for home buyers, encouraging you to join the market. In parallel, banks advertise the affordability of their mortgage plans and show you how they can make your dreams come true.

Of course, these initiatives don’t arise from charity. There is a lot of money in the mortgage market. Everyone is a winner. Except you.

For the bank, this will result in income from:

  • Compound interest calculated on your mortgage: the more you borrow, the higher the interest rate, the longer the loan, the more the bank will earn.
  • Mortgage insurance and administrative fees: playing on your insecurity.
  • Early release penalty fees: if you want to pay back the mortgage early, you pay extra. (You didn’t think they’d let you off the hook that easily, did you?).
  • Forfeit clause: the potential to repossess and take ownership of your home if you default on payments.

For construction and real estate agencies, sources of income include:

  • Being able to up cost the house: selling the property for more than it cost to build.
  • Sales commission: making a profit on the sale of the house, generally a percentage of the sales price (which, again, you pay!).

For governments, there are several ways to recoup the tax breaks they give away:

  • Land tax and property tax.
  • Stamp duty and registration fees.
  • Capital gains tax from the seller if he/she made a profit (but no tax breaks if there is a loss… of course!).
  • And most importantly…

The Lockdown

For the vast majority of people, taking a mortgage means getting locked into a slave job for the duration of the mortgage (after all, the mortgage isn’t going to pay itself!).

And that’s exactly what governments want: another citizen locked into the system, producing a steady stream of income tax for the next 25 to 30 years! In addition to this, he/she will keep contributing to diverse pyramid pension schemes that allow current retirees to be paid.

This is the most ingenious lockdown created by society. And the best part is that we all do it happily because we actually believe it is in our best interest. Afterall, that’s what we’ve been taught since childhood…

Over a long period like 25 years and assuming a 5% mortgage rate, compound interest means that you could end up repaying more than twice the amount borrowed.

For the average middle class family, early repayment is not even an option. If they have taken such a long-term loan, it is unlikely that they could afford to take a shorter term with higher monthly payments (or their banker gave them bad advice!).

So, all their income earned from their hard work goes directly into the mortgage. This creates the most depressing and stressful situation someone can have: the fear of losing the family home. Stable employment becomes sacred.

The Way Out

If you are in this situation, don’t despair just yet! This blog aims to explain how you can get out of this trap. But change doesn’t happen by itself, you will need to modify your way of thinking and your lifestyle habits.

The only way out is to pay off the mortgage early and this means increasing your net income. There are two ways to do this:

1. By decreasing your expenses

2. By increasing your earnings

Once you have decided to embrace Monkeyism, this blog will give you details on how to achieve both objectives. Using these tools, you will be able to refinance your mortgage, make higher capital repayments, shorten your mortgage period, and ultimately save on the interest.

If you are still mortgage-free and are thinking about getting one, think carefully! Your future interest repayments and home ownership costs could exceed any money you pay on rent. So is renting really wasting money?

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Monkey Master

My wife and I are currently living in Sydney, Australia. We plan on becoming financially self-sufficient in 2015 so we can retire at 35. We are regular working people, trying to be smart about saving money and generating passive income. I want to share with you how we reached that decision and how we are planning towards financial independence. Continue Reading.

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