It makes sense to want to pay your home loan off early, being free of debt can free you of your stress and worry.
With the number of financial benefits that come with paying a home loan off faster, it can seem like an easy decision if you have the funds to do it. However, in some situations, it might be better to hold on to your money instead.
Here are some advantages and disadvantages to paying your home loan off early that you should keep in mind.
Does your loan allow extra repayments?
Check before you start. Some loans, particularly fixed ones, cap extra repayments or charge a break fee, which can cancel out the point of paying ahead. If your loan has an extra repayments facility you can pay the balance down faster without that penalty. Your lender can confirm which applies.
Before you consider making extra repayments on your mortgage check that your home loan has an extra repayments facility. This will allow you to pay your home loan off faster and not incur any extra fees for breaking a fixed home loan rate. Having to pay fees for paying your home loan off faster may cancel out any money you save paying off your mortgage early.
How much interest does paying early actually save?
Interest is charged on the balance, so clearing it sooner means less interest overall, potentially thousands of dollars across the loan. How much depends on your rate, your balance and how early you pay. The saving is real but it is not a fixed figure anyone can quote you upfront.
The faster you pay off your home loan, the less interest you’ll have to pay for it. This is the biggest advantage of paying your home loan off early, as you can potentially save yourself from paying thousands of dollars of interest. By paying your home loan off faster you will also lower the risk of encountering interest rate increases.
What do you give up by paying the loan down early?
The use of that money. Anything put into extra repayments is no longer available to invest or to hold as a buffer. If you would otherwise put it to work elsewhere, the comparison is between your loan’s interest rate and what that money could reasonably earn after tax.
Any money you use to make extra repayments on your home loan, cannot be invested. Therefore, if you are the type of person that likes to invest it may be worth holding onto that money, so you have more cash available for investing.
Should you clear other debts first?
Often, yes. Home loans generally carry the lowest interest rate of any debt you hold, so paying extra off the mortgage while a credit card, personal loan or car loan is running costs you more than it saves. Clear the dearer debt first, then look at the mortgage.
Home loans generally have the lowest interest rates out of all loans. So, it makes sense to not pay them off faster if you currently have debt from credit cards, personal loans, or car loans.
Ultimately, whether you decide to pay your home loan off early or not is a matter of personal preference. There are both benefits and negatives to paying your mortgage off faster.
If you would like to learn more about paying off your mortgage, please contact us today.