We’ve come up with three good reasons why it could be beneficial to wait a little longer before you pay off your mortgage.
Mortgages can be complex but they needn’t be unnecessarily costly. Although achieving full home ownership is a great goal, you may benefit from investing your spare cash in other ways instead of using it to make optional mortgage repayments.
1. Pay off other debt first
In the current Australian housing market, mortgage interest rates remain historically low, with the average rate sitting at around 5 per cent. By contrast, the interest rates for other financial products such as credit cards and personal loans can reach, and even exceed, 15 to 20 per cent. Though interest rates may rise, they have remained below 11 per cent since 1994.
It could make more financial sense to address your obligations that attract higher interest rates before making optional mortgage repayments. This is particularly advisable if your home is listed as collateral for your other debt.
Have a chat with your financial advisor about your personal financial circumstances. Eliminating any high-interest debt first, or even consolidating it into your home loan, could be the way to go.
2. Use your funds to invest
With mortgage rates at such low levels, many home buyers contemplate using their savings to invest in other products, such as an investment property or another asset class like high-interest savings accounts, shares or bonds.
With a mortgage rate of 4.99 per cent, for example, it might be wise to make a medium- to long-term investment that will earn a return of 8 per cent. This could even generate enough additional income to help you finance your home loan repayments.
If you have some savings up your sleeve, weigh up the pros and cons of delaying early mortgage repayments in favour of diversifying your investments.
3. Avoid substantial fees
If you have a fixed-term home loan, you are likely to be charged fees if you pay off your mortgage before the end of the fixed interest rate period. These charges compensate your lender for the economic loss they experience when the loan is paid off in advance. Paying instalments early may also attract fees or may not be permitted within the loan’s contract. Talk to your lender about this as these charges can be sizeable.
Early discharge fees may also apply to other types of loans. The rules changed on 1 July 2011 and many lenders will consider removing exit charges on mortgages that began before this date, so be sure to ask your lender if this applies to you.
If you have a home loan, there are a range of repayment options to consider. At the end of the day, the important thing is to choose whichever plan is the best match for you and your financial circumstances.
(Jaymes Carr is a writer, editor and contributor to the Domain blog. He works with clients in the finance, technology, law and real estate industries. Jaymes is particularly interested in architecture, sustainable design, and public art. (abs-cbn)