Repaying a home loan can require years of carefully planning your finances. The thought of getting this burden off your shoulders by paying down the mortgage fully can be tempting if you have the cash to do so. However, you should remember that a sum of money large enough to pay off a mortgage can also be used for investment purposes or even as a rainy day fund. For this reason, you may want to also consider all other possible options relevant to your financial situation apart from repaying the mortgage.
Why should I not pay off my mortgage in full?
If your focus is on minimising your debt-related expenses, paying off a mortgage early can help you save the significant amount you’d pay as interest on the mortgage. However, you can also reduce your loan interest by using the offset and redraw facilities usually offered by lenders, while also having access to the money you’ve repaid. For instance, you can use the offset account linked to your mortgage as a transaction account and withdraw money whenever needed. On the other hand, you can choose to make larger repayments and then redraw from your mortgage.
Suppose you have saved up nearly enough in your offset account to repay the mortgage entirely. You could then choose to make interest-only repayments as a way of keeping your mortgage open. You may also need to pay the annual mortgage fees, but these expenses may not be significant compared to the amount you have at your disposal. You could withdraw some of this money and renovate your home, potentially increasing its market value in the process. With most of your mortgage repaid, your equity in your home may increase, allowing you to leverage it to purchase an investment property.
Another factor to consider is that the interest rate on a mortgage is typically much lower than that on credit card debt or personal loans, making it more financially prudent to redraw from your mortgage. By paying off your mortgage, you’d lose access to this cheaper source of debt and possibly pay more in interest elsewhere. Instead, you could consider taking money out of the offset account to consolidate your borrowings and minimise your debt.
When should I consider fully paying off my mortgage?
Notwithstanding the advantages of keeping your home loan open, you may face several situations wherein you need to discharge the mortgage, such as when you plan to sell the home or are nearing retirement. The deed to your home remains with the bank during the lifetime of the loan, and without it, you won’t be able to transfer ownership of the property. Also, if you are prone to redrawing from your home loan and unable to control your expenses, closing the home loan early may be the best option as your repayments are likely to stretch out and cost more in interest.
Unless you are keen on investing money in another property - which can earn you rental income and qualify you for tax deductions on loan interest payments - you may not need to keep a mortgage open. You might, however, want to build up additional savings before paying off the mortgage and losing access to the funds accumulated in the offset account.