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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.
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