It may be tempting to pay off your home loan early if you’ve received a fortune of cash or accumulated a significant quantity of money over the years. Whether or not paying off the mortgage early is a smart idea depends on the borrower’s financial situation, the rate of interest on the loan, and how near you are to retiring.
The six factors to examine are as follows:
- The current market value of your house
- Your mortgage interest rate
- Home growth in your region
- Your income tax rate
- Inflation expectations
- An anticipated rate of investment return
Paying off the Mortgage Early
Some homeowners opt to pay off their mortgage early, and the advantages vary based on the individual’s financial situation.
Retired people, for example, may wish to minimise or erase their debt because they are no longer generating an income from employment. In other situations, consumers may wish to reduce their monthly cash withdrawals by refinancing their mortgage.
Depending on the form of your current mortgage, you may need to verify with your lender to be sure there are no fines for paying off your loan early. Fixed-term mortgages, in general, would pay a ‘break charge’ if returned prematurely, but floating or revolving credit agreements would not incur these costs and may be settled at any moment.
One of the most significant advantages of paying off your loan early is the reduction in interest payments. You may save tens of thousands of dollars in interest payments. When you pay off your mortgage early, you are assured a return on your investment.
Paying off your mortgage quicker means you’ll have greater equity in your house sooner. This can make you eligible for refinancing, which can save you much more money over time. You may also be able to capitalize your equity through a home equity loan, which you may use to make renovations that raise the value of your property or to repay off another higher-interest loan.
Investing in the Market
If a homeowner is thinking about paying off their mortgage early, it’s worth thinking about whether part or all of the cash might be better served investing in the financial markets. For the final ten years of the loan, the rate of return on investment may surpass the rate of interest paid on the mortgage.
In other words, the capital cost, or the interest that could have been generated in the market, should be addressed. However, several variables must be considered while assessing an investment, including the projected return and the risk involved.
The potential of compound interest over time is something to keep in mind while investing. The earlier we begin investing, the longer we have to wait for compounding to take full effect. If you are willing to accept some fluctuations along the road, investing rather than having to pay extra on your mortgage may be a better option for you.
Investment Gains vs. Loan Interest Saved
If a homeowner chose to invest $100,000 rather than pay off their mortgage in ten years, they would earn $22,019 based on a 2% average rate of return. In other words, there would be no discernible difference between investing the money and paying off the 3.5 per cent loan.
With a 10-year rate of return of 7% or 10%, the borrower would earn more than double the interest saved from paying the loan off early even with using the 5.5% loan rate.
If you’re still on the fence about which option is best, you may not need to choose between paying your mortgage early and investing. Rather, you can take a two-pronged approach to reducing your debt and growing your wealth. To discuss the best option to suit your lifestyle, contact our expert mortgage broker.