I explore their journey and reveal the five key steps they took….
The beginning [2010]
Perth couple, Phil and Lauren already lived in a modest home and like most of us had a home loan to go with it. They also had an investment property but neither suited their family. They wanted a bigger place.
It was 2010, and repercussions from the global financial crisis were still being felt. But needs (and kids) don’t stop growing.
Phil and Lauren were in a strong position, they had a few options for how to upgrade to a family home. Like selling properties, cash, and shares.
How they chose to buy this property was part of a 14 year chain of events that looks to have set them up in a financially strong position.
What did they do?
They chose not to sell any assets and instead borrowed everything to buy their future family home. The trade-off was delaying moving in and instead prioritising the financial and tax benefits. They also extended themselves by taking their total loan exposure to over six time their incomes.
Financial position [2010]
Here is their financial position at the time of purchase.
Income [2010] – $221,000
Their household income was $221,000. It consisted of a full time salary, a part-time salary and some rental income.
Spending behaviour [2010]
They described their spending behaviour as the lower end of moderate. This was expected given the home loans that needed managing. They also lacked any personal loans—these can be an indication of spending beyond means.
Assets [2010] – what they own
Phil and Lauren were in a (some say lucky, but I say well-earned) position of having options to buy. Their asset position meant they could did not need to borrow the entire purchase price in order to buy their home. They could contribute savings or sell shares to help make it happen.
It is worth highlighting theirs was a one car family. I find one car families usually have good handle on their finances. There is a difference between being a one car family by choice rather than necessity.
Liabilities [2010] – what they owe
Phil and Lauren had a relatively uncomplicated financial position in that the only ongoing commitments they had were home loans.
Net Worth [2010]
Phil and Lauren had a net worth of $686,000 when they bought their future family home. If they sold property and shares, they would have had around $500,000 in cash to go towards their new home—they chose not to.
So, what exactly happened to turn $686,000 into $3,100,000+ when I caught up with clients in 2024? I explain below.
My take on initial position
There is the age old question for people wishing to upgrade their home. Should they sell a property before buying the next one?
Having some savings and around $400,000 in property equity was great start that gave them options. They could have cashed in on their equity by selling properties and bought something different – more expensive. Instead, they bought more modestly and held properties which better suited their wealth creation strategies.
Buying the property [2010]
PURCHASE PRICE – $780,000
What did they buy?
They purchased a four-bed, two-bath house on a divided block 10 minutes from Perth for $780,000.
What did you like about the property?
“We saw it as a future family home. It was in the same area as were living. Close to work, school and the café strip”
What was the market like when you bought?
“We remember the market being relatively soft, which is why we preferred not to sell our properties at the time. This was the only property we tried to buy and managed to get this property for $50,000 under the asking price. It was possibly being sold as part of a relationship breakdown.”
What was your buying strategy?
“We bought the property as an investment initially. This made it more affordable and allowed us to move into the property when it made financial sense to do so.”
How did you decide on the purchase price of $780,000?
“We did want to spend any more than this because were we mindful our overall debt was a lot. The important thing for us was to stay in control of the timing of any other property sales. We wanted to sell when the market improved rather than sell because we were stressed about repayments.”
How much did you spend on improving the property?
“We spent $150,000 on improving the property condition and most notably adding an extra bedroom.”
My take – Property purchase
Phil and Lauren bought this property from motivated sellers in a soft market. Buying within their means meant they could time the sale of the other properties when the market improved.
Home loan [2010] – $816,000
Phil and Lauren used their existing equity to keep their overall loan exposure to 80% LVR. Given the investment angle to the purchase, they borrowed 100% of the purchase price plus using some existing property equity and funds from existing loan facilities.
Repayments
They chose interest only repayments to prioritise spare cash to offset their owner occupied home loan.
Features
A offset account was chosen as a feature of the new investment loan but used this only once moved in.
How much of your savings was used?
“No savings were used to help with the purchase price. All our cash was kept from the purchase to offset any interest on our owner-occupied home loan.”
How did you feel about taking on a home loan?
“We felt comfortable increasing our borrowing as we had had home loans before. We had already done our own workings and mapped out how the home loan might be paid off quickly – it was always a goal.”
My take – Home loan
Borrowing the full purchase price plus costs sounds counter-intuitive, especially when you have some cash and shares lying around. But given the this home was initially an investment, it made sense for the clients to prioritise reducing interest on their current home loan, not their future home—yet.
The offset accounts enabled them to reduce interest on any home loan they wanted to prioritise reducing interest.
Interest only repayments made sense at the time as the interest on the purchase was tax deductible, wheras their current home loan was not – that is where any spare cash was directed to offset interest.
Getting a home loan is as much about a strategy to match your goals and objectives than anything.
I introduce borrowers to licensed mortgage brokers so they can get a home loan structure for their unique journey.
Summary of the start [2010]
A growing gamily, this is how they planned their family home upgrade. Not only did they borrow $816,000 but they also spent $150,000 on improvements. The house owed them $966,000.
they managed to turn this debt into a net worth over $3,100,000 by 2024.
The 8 year home loan payoff
Here is how they paid their home loan off in five steps.
1. Expat work assignment
A big reason for committing to this expat work assignment was to pay off home loan.
An overseas work assignment came up that was both opportunity and, as many would call it, a sacrifice. The opportunity, aside from career development, was the income incentives that would go a long way to paying off their home loan. The sacrifice was that it was not a glamorous location, and the whole family moved away for a couple of years.
2. Increased income
The income incentives expat assignments offer can come in many forms – increased salary, and incentives like shares or bonuses. Benefits beyond the initial assignment can be when valuable experience is reflected in significent career progression and remuneration packages. This can be seen when we revisit the current income position for Phil, who has grown his income to the $500,000+ range.
3. Lump sums for loan reduction
Having a home loan that allowed for bulk reductions without penalty was important for these borrowers.
Lump sum reductions were key to paying off the home loan quickly. When clients sold the properties they initially held, the capital gains from the sales went to bulk reductions to their home loan.
There were also significant bonuses from employment directed towards home loan reduction.
4. Investment purchase strategy
Buying the property initially as an investment meant they could use rental income and tax benefits to assist with managing the repayments that come with a high loan exposure.
Their strategy was part-delayed gratification and part-being comfortable with the risk of being exposed to the property market in holding existing properties rather than selling.
5. Offset feature
A clever repayment strategy that helped accelerate paying the mortgage off was to commit regular monthly savings to the offset and have the discipline not to spend it.
Was paying of the home loan rapidly a GOAL?
“Yes. It was a goal from the outset. We did our own calculations so we were pretty clear on how we could achieve this”.
Were there any hurdles?
“Our family grew which limited our working capacity. The overseas assignment, while providing so much opportunity for us, also meant only one of us could work. So, there was an enforced career break.”
Financial position [2024]
Phil and Lauren paid of their home loan paid off in 2018, but they did not stop using their money to build wealth.
Income [2024] – $600,000+
Increased income can come with an inevitable lifestyle creep. Phil and Lauren have kept much of their lifestyle (and expenses) in check while using their income to continue to build wealth.
Financial Position [2024]
Here is the financial position that makes up the $3,100,000+ net worth.
My take on their journey
While paying down a home loan was a clear goal for these two, they did not stop investing.
They have two other properties. A beach block located a couple of hours from the city as well as a smaller investment property interest.
Super has grown from $100,000 to $800,000.
They have significant savings and shares which gives them control, meaning they do not need to rely on loans for funding any future investments, unless they want to.
Interestingly, they are also invested in actual bars of precious metals.
Could they buy bigger – borrow more?
Yes. But their journey is about prioritising financial freedom over buying bigger and better.
Something to share: From Phil and Lauren
When asked what they felt has helped them:
“I would say have mortgages within your means and not what the bank says you can borrow.
Start off with a smaller house and work your way up. I started with a small unit, then sold that and used the profit for our next house.
Pay for things like cars with your own money.
We also have a trusted network of friends and family they share regularly financial information and goals with.“
What next?
Clients admit they are at a different stage of life and finances now. They can entertain spending money on “the nice to haves” because their home loan is paid off. That is what financial freedom is allowing them.
They still want to build on their beach block, so the how much they spend on nice things might determine how quickly they can fund this.
If want to see if you have the right home loan structure for your journey – I introduce borrowers to licensed mortgage brokers here:
Note for readers:
The following may have been altered to retain anonymity of my clients.
– Name of client.
– Facts and figures. These are a combination of verified and unverified amounts. Some have been slightly altered (rounding) to assist with retaining anonymity of my clients. None change the spirit of the story.
Definitions of ratio calculations:
DTI
– The ratio derived from taking all debt limits like home loans, car loans, credit cards, etc
Divided by all annual income – from jobs, rent, etc
Repayment Ratio
– Actual repayments based on interest rate at the time of loan origination over the loan term.
– If interest only repayments were chosen as part of a 30 year term – a 25 year payback period was used in the Repayment Ratio calculation.
Net worth
– Everything owned minus what is owed
– Assets minus liabilities
Definition of no home loan – follow link
