My exact plan to pay off my mortgage in 5 years or less

Discussion in 'Investing and Retirement Saving' started by Tiplady, Nov 4, 2015.

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  1. Tiplady

    Tiplady Newbie

    I’m really tired and fed up with paying my mortgage! It’s really beginning to irritate me. I have finally given this problem a lot of thought and I’ve come up with a plan to pay off my mortgage in five years or less using the stock market and hedging.

    Although interest payments are really low at the moment it’s unlikely that it will remain like this forever and if I’m struggling to make ends meet now how will I cope with the future interest rate hikes when the economy improves?

    I know that there are a lot of people in exactly the same position looking for a way out. Removing the shackles of your mortgage would be like a dream coming true especially if I can do it in less than five years.

    My Present Situation
    My Existing Mortgage Rate and Term

    I’m in a mess really, I’ve failed to plan well when it comes to my mortgage and I now find myself knee deep in trouble. I purchased my property in 2003 4 years before the property bubble burst, the cost of my 3 bedroom house was £132,000, it was a good price for a three bedroom property in near central London, it was a stone’s throw away from Stratford City which hosted the Olympics in 2012.

    Although I’ve had the property now for nearly 10 years I’ve only been paying interest on it which was one of my biggest mistakes, if I could go back I would probably slap myself in the face and force myself to get onto repayments rather than stay on interest only. I have worked out that in 9 years I have paid £54,000 in interest and paid nothing towards clearing the principal debt of the property.

    What I Should Do To Clear my Mortgage Quicker
    Overpayments and Better Mortgage Deals to Clear Mortgage

    Now that I’m aware of my problem there are a number of things that I plan to do to clear my mortgage faster, the first thing that I will do is call Santander Bank Whom I have my mortgage with and switch immediately to repayments, the interest rate I am on at the moment is 4.49% and I am paying interest only payments at £510 per month, once I switch to repayments I will need to pay £910 per month where £410 will go towards paying off the principal mortgage of £132,000.

    I have also invited a lodger to stay with us, normally a room in London costs around £250 per month however as this lodger is an extended member of the family I am charging him only £120. I have asked him to make the payment to direct to my Santander mortgage. My phone plan will end soon and I’ll have an extra £40 per month which I will be diverting to overpayments. Once I switch to repayments I will be paying an extra £4920 (£410x12) towards my principal, I will also be making overpayments of £1920 towards my principal. Over five years if everything remains the same I will have paid off £34,200 off my mortgage which means that I will have just over £100,000 left to pay off.

    I will also look around for a better mortgage rate, if I can switch lenders and save 1% in my mortgage I would be paying £100 less interest every month which I could divert towards paying off my principal mortgage.


    My Exact Plan to Pay of My Mortgage in 5 Years
    Will it Work?

    So now that I’m making inroads into paying off my mortgage, by switched to repayments and consciously making an effort to divert all my surplus income to pay off my mortgage I will still need to find another £100,000 to pay off the remainder.

    I have £36,500 in my savings account of which £19,500 belongs to my friend who I’m looking after the money for, he has agreed to let me look after the money as he is a bit of a spendaholic and insists he will not need it for at least 5 years. This means that if I put the £36,500 in a savings account paying 4% my money will grow to £44,077, after returning £19,500 to my friends I will be left with £24,577 which means I still have a shortfall of over £75,000.

    After taking this into consideration I knew that if I stood any chance of paying my mortgage off in five years I would have to look to the stock market. Now before you hit the back button I think I may have found an idea/strategy that might just work and I would appreciate any comments or feedback you can give.

    My Strategy is very simple, I need to take £36,500 and turn it into 119,500 in five years; this represents an increase of 227%. You might be forgiven for thinking I’ve gone mad however there are investments which can give you phenomenal returns and if you can manage your risk effectively then you can make a lot of money.

    My plan is to invest the money into mutual funds over a period of five years and pick funds which have the best returns with the least risk. I will be using to do most of my research and as you’ll see there are a number of mutual funds which have effective risk management which offer great returns. Here are some of the funds that I’ve shortlisted.


    Fidelity UK Smaller Companies Accumulation Units
    Risk Score 92
    5 Year Return 189%
    3 Year Return 101%
    1 Year Return 35.3%

    Aberdeen Global Asian Smaller Companies
    Risk Score 74
    5 Year Return 167%
    3 Year Return 71.9%
    1 Year Return 27.0%

    Aberdeen Global Emerging Markets
    Risk Score 87
    5 Year Return 157%
    3 Year Return 59.7%
    1 Year Return 227%

    AXA Framlington Biotech
    Risk Score 126
    5 Year Return 146%
    3 Year Return 58.9%
    1 Year Return 32.4%

    Standard Life Investment UK Equity Unconstrained Return

    Risk Score 90
    5 Year Return 138%3 Year Return 72%1 Year Return 34%

    Combined Portfolio
    Risk Score 87
    5 Year Return 158.6%
    3 Year Return 71.2%
    1 Year Return 29.6%


    As you can see from the performance charts the portfolio fell almost 20% during the market crisis in 2008 however it quickly recovered to flourish and risen over 158% in 5 years. The FE Risk Score is a measure of how volatile the portfolio will be; to put things into perspective the cash represents a FE Risk Score of 0 while the FTSE 100 represents a risk score of 100.

    If I get a similar performance over the next 5 years my initial investment of £36,500 should grow to £78,767. Unfortunately there will still be a short fall however if I can save more and add to the fund every year I should hopefully meet my targets.

    What if the Stock Market Crashes?

    The first stock market crash that I encountered was the technology bubble in 2000, then next crash I witnessed was the sub-prime lending crisis in 2008, it seems as though most crashes happen every 8 to 10 years which would mean the next stock market crash would be somewhere 2016 to 2018. If a crash did occur in 2016 I would still have 2 years remaining for my investment, what would I do?

    The answer is hedging and protecting your portfolio against sharp stock market declines, there are many savvy investors who are able to mitigate or offset the losses on their portfolio by using options to hedge the portfolio. There are two ways that you can hedge your portfolio using options, you can either buy put options or you could buy a options spread, to learn more about both these strategies you should definitely check out the following links

    To protect your portfolio using options you need to know the volatility, Alpha, Beta, Gamma of the mutual fund portfolio. These indicators are known as the Greeks and help to determine how the portfolio moves, if you can then find an index option which has similar characteristics you can hedge the portfolio against downside movement.

    My Portfolio Greeks

    Volatility 14.93
    Alpha 15.40
    Beta 0.87
    Sharpe Ratio 1.04

    The closest index option that you can use to hedge this portfolio is the S&P 500 Index this means that if the portfolio was to fall 10% the S&P 500 would also fall 10%, if the portfolio was to rise 10% the S&P 500 would rise 10%. Both the portfolio and index have very similar movements because they have very similar Greek Indicators. Now whenever a crisis or crash is imminent you could use the S&P 500 to hedge the portfolio.

    The Markets are About to Crash

    Let’s suppose its 2016 and there’s a crisis that might topple the stock market, your portfolio has grown to 100% and you’re worried that the crash might wipe out the profits you made. What you could now do is create an option spread using S&P 500 Index options which would rise in value if the stock market fell by a greater or equal amount. You could set up the option spread so that a 10% fall in the portfolio would generate a 20% rise in the option spread.

    Will This Work?

    I will try to learn about the stock market as much as possible so I can identify when the markets are about to crash, if I can learn about effective risk management and how to hedge my portfolio I really think I have a chance of paying off my mortgage in five years or less. I will continue to update this article every month to show how much progress I am making in paying off my mortgage. Please feel free to share these ideas and leave a comment if you have any tips or advice you can offer.
    Ammo_Ram likes this.
  2. Ammo_Ram

    Ammo_Ram Newbie

    I'm also looking to pay off my mortgage early, here are some of my ideas. To me having a mortgage is like having shackles around your ankles, no one likes paying a loan especially a mortgage and therefore many people ask how to pay off your mortgage sooner. Most people refinance mortgage to pay off debt or ask how to refinance your home mortgage to make it cheaper. The question you really should be asking is whats the best way to payoff mortgage and debt in 5 years. There are many ways you can do this and if you can successfully implement all these strategies then you will really make a difference to your finances in the long run. Just imagine paying your mortgage off in 5 years instead of 25!

    When you repay a mortgage you pay interest and a bit of the principal value of the home. If for example you have to pay $1000 then $800 goes to the bank as interest payments and $200 goes off towards paying the principal value of the house. Overtime the interest falls faster than the principal payment. If you have purchased a house for $200,000 then the chances are you will pay back $500,000 after the term of the mortgage. Don't be caught out by lifetime loan agreements as the payments never finish.

    Make Aggressive Overpayments Greater Than Mortgage Interest To pay your mortgage off faster you need to make overpayments. If for every monthly payment of $1000 you make and $200 goes towards reducing the mortgage then if you can overpay by another £200 per month this will mean than you don’t have to make a payment of $800 in interest. The more you over pay the faster you will be able to pay off your loan. Lenders and banks want you to make as less payments as possible so they make more money in the long run.

    You have to find ways of generating extra income from your home to pay your home off quicker. If you have the ability to add rooms to your property and then rent them out then this is a great way to generate income. If you can add 3 rooms to your home and then charge $400 per room per month then you can expect to get $1200 a month. If you pay $1200 extra towards the mortgage this means that you will be wiping off 6 $800 interest payments saving you $4800 in interest costs. Also another word of advice is not to be fooled by equity release plans and reverse mortgages as this adds to the term.

    From time to time many credit cards companies provide introductory offers of 0% interest for 12 to 18 months. If you can continually get credit at this rate and use the proceeds to pay off the mortgage then you will be paying the loan off soon. If you can generate 10 credit cards each offering $10,000 at 0% for 18 months then you can use one card at a time to pay off a chunk of your mortgage and pay your credit card off and then continue the process. For every $10,000 payment you make you can expect to save $60,000 in interest payments which is a significant amount.

    The most important concept of paying your mortgage off early is to make overpayments; the more money that goes towards paying your actual mortgage off the quicker you can eradicate the debt. It is better to use savings to pay off your mortgage as over time you will save more. Look for ways to generate more income from your property and use that towards the overpayments. Check to see if you can borrow money at low introductory rates to pay chunks off your mortgage. By using these strategies alone you can significantly slash the amount of time it takes to pay your mortgage off.
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