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Home is Where the Financial Heart Is

We all know that to become financially independent you need to get your expenses down below the level of your investment income. It’s a remarkably simple formula but one that can seem unattainable. However the maths doesn’t lie…do it and you’ll have reached the promised land that is FI.

I’d wager that the largest expense on most household budgets is housing be it in the form of mortgage payments or rent. The Office for National Statistics says that in 2013 UK households spend on average £641 per month on housing (mortgages or rent) or £897 if you live in London. If you’re living outside London and earning the average UK wage (£27k) then you’re housing costs would represent 36% of your take home pay if you confirm to the norm.

So, if you can come up with a plan to eliminate or reduce your housing costs then you’ll put yourself in the enviable position of being well on the way to reaching financial independence.

Take a look around at the FI Babbas out there that are already living FI and you’ll soon notice they all have one thing in common, a laser like focus on achieving a reduced housing cost. This can be done either from living somewhere cheap or focusing on the rapid over payment of mortgages or ideally a combination of the two.

A few examples from the world of FI…

Jacob at Early Retirement Extreme took this to the extreme in order to achieve his freedom. Although he lives in a house now much of the accumulation phase of his journey was spent living in an RV. Now that might be too far for some people but it’s a fantastic example of one way to supercharge your savings rate by all but eliminating housing costs early in the journey.

MMM on the other hand is/was a bit more pragmatic. His view is to buy a nice house, one so nice you wont want to leave. Leaving your house usually ends up with you coming home with less £$ than when you left so what he says makes some sense to some degree. It also helps massively that he has a background in construction so is a DIY guru. This has enabled him to buy in a modest area and add value (pleasure mainly but I’m sure financial too) through his significant home improvements, and of course he’s mortgage free.

Here in the UK we see the same pattern. Despite shamelessly bragging about his new swimming pool1 (that he’s no doubt been enjoying in the recent heat wave),  the Escape Artist has eluded in the past to mortgages being like a chainsaw.

Then we have the Ermine who wisely managed to avoid the common middle aged folly by “having less house than my [ex] colleagues”.

If that isn’t enough evidence for you then I suggest you sit down and analyze your monthly spending and work out exactly what % of your net income flies out of the window on housing costs. Assuming it is a sizeable %, shut your eyes and imagine how much nicer the world would smell if it was 0%.


UTMTs Mortgage Journey

When we moved out of London a few years ago it was part of our master plan of living a simpler, cheaper life. The main motivation was the fact that London housing is so expensive compared to areas that are commutable. Our plan was pretty simple:

1. Continue to earn London wages by commuting back in to town

2. Buy a modestly sized house for non London prices

3. Pay the mortgage off as quickly as possible

We’ve been fortunate both in our timing and circumstances.

Unlike a few friends of ours we managed to keep our well paid jobs in the Finance industry throughout an unprecedented financial crisis. Until very recently we’ve had two good incomes to throw at mortgage overpayments. On top of this we’ve been sat on a variable rate mortgage throughout a time when interest rates have been at a record low for the last 6 or so year.

The last few years have been spent diligently following the mortgage overpayment rules to a tea. It’s perhaps not been the most exciting thing to do each month but the end goal has always been the focus.

Part way in to the journey we hit a wall…but we kept going. The motivation of checking the mortgage spreadsheet after each months overpayments was huge and perhaps the biggest single factor in keeping the momentum going.

Thanks (mainly2) to these efforts, we’re now in a position to all but pay off the mortgage completely.

The reality is we won’t because part of the mortgage is on an interest rate of less than <1%. For this portion of the loan we have cash savings/investments earning more than that which have been earmarked against the outstanding capital. Should interest rates rise we’ll likely dispose of this investment capital top pay down the existing loan.

The details are unimportant here it’s the result that is of central importance.

In essence, we are now mortgage free.

Reaching this milestone is incredibly liberating. We live a relatively simple/low cost lifestyle so the major ‘mandatory’ expenses we have left are utilities, council tax and food3 – none of which couldn’t be funded by a shelf stacking job in Tesco if push came to shove. After that our expenses are linked to our ‘wants’.

At times, particularly at the start of this mortgage overpayment journey it felt like progress was painfully slow. However I can look back now and enjoy the fruits of an almost obsessive determination to rid ourselves of mortgage debt4.

Once the snowball that is capital repayment got rolling, it became easier and easier to reach the zero balance.

Watching it happen each month was the perfect display of compound interest at work. The more capital that was paid off, the less interest we were charged, enabling us to pay even more toward the outstanding capital.

Compound interest is one of those things that takes a while to get hold however when it does, it’s a beautiful thing to behold.

Hang On, Isn’t There a Better Way?

Some will point out that I could have quite easily have achieved a better investment return by instead investing all of those monthly overpayments. With the benefit of hindsight I have to agree with them 100%…up to a point.

Over paying a mortgage can be seen as a risk free investment. Each payment reduced my capital and thereby future interest liabilities, leaving me with more disposable income in the future. If I’d been pumping the money into the stock market all these years I’d have been worrying about all sorts of things such as:

Instead I got to experience a warm satisfying feeling every time I logged into my bank account and instructed another overpayment to the mortgage company. No worry, no tracking returns just the knowledge that I was getting a guaranteed return and was definitely moving closer and closer to being mortgage free and nearer to becoming financially independent.

In any financial writing there is always much mention of risk v reward. To date I’ve not encountered an investment that maximizes the payoff between risk and reward (including non monetary reward) anywhere near as much as paying down the mortgage.

Even if I had the benefit of hindsight (knowing I could have made more investing the over payments instead) I’d still have chosen mortgage elimination instead.

So What Next?

Over the last few years we’ve been pumping lots of extra cash into additional capital repayments each month. Going forward we’ll have any money that previously would have gone to the mortgage company spare to either invest in ISAs, further deleverage the buy to let portfolio or to put towards other investments such as SIPPs, peer to peer lending etc.

Of course just because you’ve got rid of your mortgage doesn’t mean your housing costs are zero in perpetuity. Owning a property means you need to pay for it’s maintenance too. We’ll still need to be financially ready for the typical things that crop up from time to time (roof repairs, new boilers etc).

Despite this it feels like the money tree is about to get a large shot of fertilizer. So long as the spare cash flow doesn’t all get spunked on designer changing tables then I hope to be able to spend the next couple of years building our income producing investments at a much faster rate than before.

Changing Risk Profiles

Knowing that you own your home outright is incredibly liberating. Suddenly as well as having more disposable income to invest I am also feeling more bullish about taking risks with my spare capital…safe in the knowledge that there is a roof over my head that has been paid for.

It finally feels like FI is significantly closer than it was when a mountain of debt was attached to the place where I rest my head every night.
1 OK, we’ll let him off as it is rather modest 😉
2 Some reshuffling of finances has enabled me to pay a decent lump some to get us over the line though as stated the hard work has been done by monthly over payments
3 I’ve ignored my extortionate commuting expenses (annual train season ticket) here as it is tied inextricably to my job. The moment I quit work (or am fired) that expense will cease.
4 Of course I still have a material amount of buy to let mortgage debt but in all honesty I don’t worry about that at all due to my low risk approach to BTL.

{ 27 comments… add one }
  • The Escape Artist July 22, 2015, 10:02 am

    Fantastic progress. Houses don’t make people happy….people (and an absence of mortgage worry) make people happy.

    • Under The Money Tree July 22, 2015, 10:09 am

      I fully agree. Fundamentally nothing has changed…i’m still working too much, still commuting, still living in the same house, still getting paid the same each month but I’m suddenly a LOT happier 🙂

  • ermine July 22, 2015, 11:14 am

    Although the reason I have less house than my colleagues was that I took a massive hit in the 1990s, I wouldn’t have it any other way now. Unlike many (most?) Brits my house is not the largest part of my networth (if indeed housing is part of networth, which is a different argument). I could upsize, and pay cash. But why? All that extra cleaning, maintenance, furnishing, painting. I may one day move to a detached place (for noise) and probably a bungalow but so far the noise and the stairs don’t bother me in the least.

    Early retirees would do well to bear in mind that saving into a pension and putting the 25% PCLS is a great way of paying off your mortgage capital from pretaxed savings, but it doesn’t really help very early retirees like your good self – it’s mainly a win for the late 40s-fifty-somethings.

    • Under The Money Tree July 22, 2015, 11:30 am

      I fully agree. I was talking with friends at the weekend about their current attempts to move (ignoring the money, it’s a lot less liquid market out here in the sticks than it is in the smoke) and they both gave me stunned looks when I said I’d consider downsizing at some point. We currently live in a relatively modest 3 bed detached property and according to their norms should be striving for bigger and [supposedly] better.

      I’d happily swap for a smaller place in the right location (for me that is on a hill with a view of rolling countryside and wheat fields for neighbours ;-)) if it was going to be a place we’d stay in for good. I have no desire for en suite bathrooms, walk in wardrobes etc. If it’s got a quite location, a wood burner and is low maintenance then i’ll almost certainly be happy.

      • dearieme July 25, 2015, 12:12 pm

        “the right location … that is on a hill with a view of rolling countryside and wheat fields for neighbours.”

        Nope. Looking back at my childhood, I know that the right location is with the sea to the south of you: the reflected light illuminates your life. There are mile upon mile of old folks’ bungalows along the south coast of England: buy one when the time is ripe.

        We would have done, except …….

        • Under The Money Tree July 27, 2015, 9:43 am

          As much as I like a sea view I have an irrational paranoia about the toll all that sea air would take on our car (I do drive a Fiat remember which do have a certain reputation for going a little rusty 🙂 ) as well as house.

  • Underscored July 22, 2015, 8:02 pm

    Property is this countries religion. Your views are heretical, what else are you supposed to do with your life other than get a mansion – MTV cribs right? 😉

  • Amber Tree July 22, 2015, 8:25 pm

    The story you tell is a good view on why I also paid down mortgage the last years, rather than investing. I fully understand you on the risk/reward domain. It just feels so good to see the open mortgage amount go down.
    We are not there yet, we still own a nice amount to the bank, but is at almost 1pct loan, so, after tax benefit, it is almost a 0pct loan.
    In my case, I sold a rental property in order to avoid big upcoming expenses. freeing up the equitu allowed me to complete big works in and around our hose and to pay off more mortgage. What is left over is now the basis for our F-money

    • Under The Money Tree July 23, 2015, 11:09 am

      Amber Tree,
      You mention a tax benefit…I assume you’re talking about a buy to let mortgage?

  • The rhino July 23, 2015, 9:00 am

    Note tesco is now selling the escape artist s pool for £30!

    • Under The Money Tree July 23, 2015, 9:17 am

      The rhino,
      Good spot…thanks!

  • Emma | Money Can Buy Me Happiness July 23, 2015, 12:56 pm

    We did a similar thing albeit in the Southern Hemisphere. We rented a tiny unit in Sydney, Australia whilst building a buy to let portfolio in New Zealand. The wages and salary we earnt in Sydney plus the stronger exhange rate allowed us to be quite agrressive when prices were low and has put us in good stead. Then when our son was born we moved into one of the houses and maintain a very affordable mortgage. Now we are considering moving to one of the smaller properties we own as we have been travelling overseas for 14 months which has helped steer us towards minimalism – plus the larger house achieves a much higher rent so it makes financial sense. I don’t buy into the approach of your home being an emotional purchase, I know for many it is, but life is so much more than bricks and mortar and an increased housing spend just reduces funds available for early/mini retirement.

  • Jason @ Phroogal July 23, 2015, 4:13 pm

    It’s definitely wise you pointed out MMM loves construction projects. Most people can’t relate so we can’t revel in his same level of home ownership savings.

    • Under The Money Tree July 24, 2015, 12:58 pm

      If you’re a home owner then building even some basic DIY/construction skill is essential if you want to save some $ on maintenance costs.

  • Mrs. WW July 23, 2015, 9:46 pm

    I agree. Being mortgage free is incredibly liberating. We are of the approach that a calmer, simpler life is better than more money. Sure you could wheel and deal and have made more money if you delay paying the mortgage extra and investing instead but that’s not our end game. In our quest for simplicity we have discovered how incredibly rich we are. We may not be FI but if both of us were to be fired tomorrow we would look at each other, smile, and say “what’s the next adventure now?” That is especially easier to do if you have no mortgage. We have no mortgages… and we own three houses including a rental property and a weekend cabin. We’re still in our thirties and have made so little at times we have qualified for free private education for our sons and less than 10 years ago we even qualified for foodstamps. It’s all doable. You don’t need as much money as so many think you do. We are so rich.

    • Under The Money Tree July 24, 2015, 1:56 pm

      Mrs, WW,
      It sounds like you’re in a fantastic position which just goes to show you don’t need to be earning a fortune to get yourself in such a privileged financial state.

  • Minikins July 24, 2015, 10:58 am

    “I’d happily swap for a smaller place in the right location (for me that is on a hill with a view of rolling countryside and wheat fields for neighbours ;-))”

    I was up on that hill after reading that…

    Paying off the mortgage can give you freedom but the house itself is a responsibility which can become a burden in certain circumstances, for example serious maintenance issues, infestations, nightmare neighbours, negative equity or conditions leading to problems in selling the property.

    I often fantasise about living in an igloo, what a masterpiece of existential domesticity! You could never take it for granted nor get too attached to it (especially in warmer weather).

    I too enjoyed making lump sum overpayments on my mortgage and it is a relief when it is paid off. It is one step further up on the ladder to that misty mountain top of financial independence. Keep going!

    • Under The Money Tree July 24, 2015, 2:08 pm

      While I agree that outright ownership of a house still comes with [financial] responsibility I@m not sure negative equity is one if your mortgage free. We’re lkely to move at some point in the next 5 years and I hope my house on the hill will also not be applicable to nightmare neighbours (see above) or problems selling as we’ll plan to stay their to the end!

      • Minikins July 24, 2015, 4:04 pm

        Yes, negative equity is the wrong term. Whoops! I meant if the market value of the house is much less than what you paid for it and you are planning to sell it. Obviously you’d have had the benefit of living in it for a few years so that would have to be factored in too.
        How is the little man? Missing a pic…

  • weenie July 24, 2015, 8:58 pm

    Well done on this great achievement UTMT – it must be a great feeling! 🙂

  • Dividend Drive July 25, 2015, 11:59 am

    Excellent post, UTMT.

    At present we rent (and rent small) for savings reasons. But once a mortgage looms into view we will certainly look to get it out of mind as soon as possible. It is maybe less “rational” and more “emotional” decision in many regards. However, it is a emotional decision underpinned by a solid rational principle.

    It is wonderful to hear that you are in essence mortgage free especially with Mini UTMT on board!

    Keep up the good work!

    • Under The Money Tree July 27, 2015, 9:40 am

      Dividend Drive,
      Yes, we humans are emotional beasts so sometimes it makes sense to tend to your emotional well being as well as just purely your financial one. You’d do well to remember this post when/if you do decide to take the plunge and buy.

  • FIRE v London July 25, 2015, 1:32 pm

    Excellent post.

    I’m not sure I agree with all of it but then I haven’t paid off my mortgage (by choice) so I don’t know what that feels like. While I could pay off the entire mortgage by selling stock market investments, in the meantime I am grateful for having some cheap leverage (<1%).

    One additional argument that I think is increasingly pertinent – in London especially – is adopting a long-term strategy of minimising your housing transactions. More by luck than judgement, I bought a bigger house than I thought I needed at the time – but as a result I have never left it. I don't think it will suit my dotage but it will get me quite a long way towards it. It is quite possible in London to spend over 10% per transaction on fees and taxes (not to mention the new kitchen, bathroom etc), which can easily represent a very sizeable proportion of one's liquid equity/cash. By resisting the temptation to move I have saved a six figure sum – and a lot of stress.

    • Under The Money Tree July 27, 2015, 9:48 am

      FIRE v London,
      Excellent point. Rising prices combined with the fact that most transaction costs for buying/selling are a % of value mean moving is becoming much more expensive. This is certainly something that will be at the top of my list in the next few years as we have probably one move left in us.

  • EarlyRetirementGuy July 26, 2015, 11:58 am

    I followed MMM’s thinking of buying a largeish house in a decent area which needed some TLC. The theory being that there should be no need for us to upsize at all even if we were to have 2 children.

    The mortgage, whilst relatively expensive, is still manageable and with overpayments we should have it cleared by our mid-30s. That then leaves us free and clear to pump everything into the ISAs and Pensions for an early retirement in 40s by current estimates.

    • Under The Money Tree July 27, 2015, 9:45 am

      It sounds like you’ve got an excellent strategy to me. Good luck!

  • theFIREstarter July 28, 2015, 10:38 pm

    Excellent work on being mortgage free!
    Weird how there was a lot of crossover on the posts we both made… shame mine didn’t have any mortgage free element to it… maybe in 10 years or so I’ll finally get there!

    I see you’ve recently “plused one” on the UTMT clan as well, belated congrats to that. Off to read those posts now as we’re slowly coming to that time of our lives as well methinks so will be interesting to get your perspective on that.

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