Is paying off your home loan off early wise?

Published on December 2nd, 2020
  Written by 
Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
Our authors

Fact checked

At Savvy, we are committed to providing accurate information. Our content undergoes a rigorous process of fact-checking before it is published. Learn more about our editorial policy.
How to choose a home loan

At Savvy, our mission is to empower you to make informed financial choices. While we maintain stringent editorial standards, this article may include mentions of products offered by our partners. Here’s how we generate income.

Your home will be one of the biggest investments you will be making during your lifetime. Most of us do not have the funds to buy a house outright, and therefore need to make a home loan. As part of the home loan, there will be interest charged above the amount that your will be borrowing.

However, according to the Australian Bureau of Statistics debt is on the increase, mostly due to inflation. The issue is that people’s household debt exceeded their growth of income and assets. In fact, debt increased by 49% and gross income by only 38% in 2016.

Consequently, with that number, the question is if a homeowner should pay their mortgage off sooner or not. But the answer to that question will be determined by their own personal circumstances. To guide you in your decision, there are some benefits and drawbacks to consider.

The benefits of paying your home loan off early

Besides saving up for a deposit, you should be aware of the cost of your home loan and the interest that will be added to your repayments. To help you gauge how much your monthly repayment will be, use one of the many online home loan calculators, or speak to your broker. If you can afford it, you can accelerate the down payment of your mortgage faster by using different strategies like paying fortnightly instead of monthly, making lump sum payments, or by paying more each month. All these strategies will help you to speed up the home loan repayment and save you thousands in interest.

Paying off your home loan faster are particularly useful for people who are nearing retirement and if you want to minimise your risk of defaulting, especially if you are self-employed. And if looking at the data from Digital Finance Analytics then the number of Australian households under stress is not that great, with around 52,000 households that are at risk of defaulting in 2018. Therefore, by paying off your home loan faster offers you a safe haven in difficult economic times.

The drawbacks of paying your home loan off early

If you have other forms of debt, especially bad debts, then it might be better to pay off those first than your home loan. Simply since home loan debt is normally cheaper than credit cards or personal loans. And by doing that, you will be saving much more interest than by sinking your money into your mortgage first.

But you should also be aware that you might be subject to an ‘exit fee’, also called an ‘early termination fee, which is a payment penalty some lenders charge their clients if they pay out the loan early. Even after the governmental ban on exit fees, some lenders might charge an early discharge, between $150 to $400. This early discharge fee, then needs to be paid before you can get hold of your title deeds. Either way, the amount that might be charged will depend on the type of loan you have.

In addition, paying off your home loan early might not be the best investment you can make. For instance, you could use the extra money you have and invest it in something that offers a better protecting against inflation. This choice will depend on your goals, but by diversifying your savings and investing your money into other forms of investments, including a second property could be rather rewarding. But remember, the key is to pay off your bad debts first, then you can invest in good debts such as shares and property. Furthermore, by applying the principle of gearing, you can create wealth by borrowing, as the income of the investment pays off the debt.

And recall, by keeping your home loan that is on a low-interest, it means that you could refinance your mortgage and then have access to extra funds to make renovations or even service some bad debt.

There is no standard answer – it all depends on you

Paying off your home loan early will be centred on your own circumstances. It is best to consult with your financial advisor, and do a proper audit of your financial circumstances.

True that you might be saving on interest if you pay your home loan off early, but it can also be argued that you could have invested in shares or another property. But again, this all depends on your own circumstances.

Did you find this page helpful?

Thanks for your feedback!

This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for home loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well as others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

In this article

Share this article

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on pinterest

Looking for a home loan?

Compare Australia’s reputed home loan lenders with us and save.

* Terms and conditions and lending criteria apply.

Smart money saving tips

Subscribe to our newsletter.

By subscribing you agree to our privacy policy

Related articles

Easily compare home loan options today

We compare home loan options for you so you can be assured you’re seeing the most competitive interest rates available in Australia.
How to choose a home loan

We'd love to chat, how can we help?

By clicking "Submit", you agree to be contacted by a Savvy broker and to receive communications from Savvy which you can unsubscribe from at any time. Read our Privacy Policy.