Paying off your home loan is a significant milestone for most homeowners. Getting rid of debt, saving on interest charges and living without the stress of the next home loan repayment sounds like a pretty good deal. If you’re close to getting there yourself, then congratulations.
However, while paying off a home loan comes with a host of benefits, it might not be the most money-savvy decision for all. Before you pay off your mortgage entirely, let’s consider the pros of doing so - and some things to think about.
Home loan prepayment advantages to consider
Here are a few financial and emotional reasons to consider paying off your mortgage altogether.
- You’ll no longer have to worry about monthly mortgage repayments.
- You’ll save money since you no longer have to pay interest on your home loan.
- There will be no more annual fees applicable on your home loan.
- With the loan closed off, the bank will no longer hold encumberance over the property title.
What should I consider before paying off my mortgage fully?
Do you have other debt to pay off first? People with multiple sources of debt often prioritise paying off loans with higher interest rates first. This can help them to save on interest in the longer run. Given home loans have a lower interest rate than many other types of debt, it may be more of a priority to target other debts before ticking off the mortgage.
As a general guide, here are some of the interest rates other debts may attract. Keep in mind, these tend to change in line with market conditions, as home loans do:
- Credit cards (interest rates between 8.00% - 24.00%).
- Car loans (interest rates between 4.00% - 11.00%).
- Personal loans (interest rates between 4.00% - 16.00%).
- Investor home loans (interest rates between 2.50% - 6.00%).
Should I consider closing my mortgage if I’m retiring?
Getting a home loan after retirement isn’t easy unless you can demonstrate another source of income, such as rental income, dividends or super income, to lenders. Some people keep their home loan open to use the redraw facility
However, if you don’t have a source of income after retirement, and you redraw on your home loan, you might find it a bit of a challenge to make the repayments.
Here are a few tips on paying off your mortgage faster
If you’ve decided to close your mortgage early, here are a few ways of doing it faster:
- Make extra payments: Use your tax refund or bonus into your mortgage.
- Consider higher repayments: Instead of making repayments at the current interest rate, make them as though you had a higher rate. Even if you switch to a loan with a lower interest rate, continue paying the same repayment amount. This will help you close your mortgage faster.
- Look for a lower interest rate: Shop around for a better interest rate and ask your current lender to match it or offer you a cheaper alternative. You can look for options on comparison websites, such as RateCity.
- Shift to fortnightly payments: Instead of paying monthly, consider switching to fortnightly repayments. You pay half the monthly amount every two weeks, so you end up paying an extra month’s repayment each year since each year has 26 fortnights.
- Change loans: Switching lenders could get you a better deal. However, make sure the benefits outweigh any fees that you’ll need to pay to close your current loan.
- Avoid an interest-only loan: Make sure you are paying both the principal and the interest. With an interest-only loan, you end up paying only the interest, leaving your principal untouched, meaning you end up paying more.
- Consider an offset account: An offset account is a savings or transaction account connected to your home loan. The balance in the account lowers the amount you owe, which reduces the amount of interest you pay, thus helping you pay off your mortgage faster.