The decision to pay off your mortgage early is tricky. The choice you make can impact everything from cash flow to potential investment opportunities and the answer will be different for everyone. We consulted Aseem Agarwal, Head of Mortgages at Global Finance on the pros and cons of paying off your mortgage ahead of schedule. Below are some of his insights.
Pros of paying off your mortgage early
Saving money on interest
Making extra mortgage payments can translate into substantial interest savings over the life of the loan. “Each additional payment towards your principal means less money spent on interest. a wise move for long-term savings”, Aseem Agarwal explains.
If you have a smaller mortgage, you are hit less hard in your pocket during tough times when interest rates are high; the impact of interest hikes is not so great.
Upcycling monthly payments
Paying off your mortgage could free up a sizable chunk of cash in the later years that can be redirected towards other financial goals, such as investing, education, or retirement.
It also means you can use the equity in your current property for other purposes, such as considering a business purchase, buying another house or building a property portfolio.
Ownership and peace of mind
Complete and mortgage free ownership of your home provides a sense of security and peace of mind. “The freedom from having a mortgage hanging over your head can be a powerful motivator and financial security provider ” notes Aseem Agarwal.
Cons of paying off your mortgage early
Potential higher returns through investment
If your mortgage rate is lower than what you’d earn on a low-risk investment with a similar term, you might want to keep the mortgage and invest any extra you can. Aseem Agarwal suggests looking at the average mortgage interest rate versus potential returns from risk free or low risk investing. This is especially relevant if you secured a low mortgage rate before recent interest rate rises.
Inability to use equity for another purpose
You may have paid off your mortgage, but that doesn’t necessarily guarantee you can access that money again. This may be due to changes in your circ*mstances, bank lending criteria or house values. For example, perhaps your employment has changed, or house prices have fallen and therefore your equity has shrunk.
Aseem elaborates: “Let’s say I paid $100,000 off my mortgage thinking that I can withdraw it later because I’ve got $100,000 of extra equity in my home. But maybe the market has fallen, and the value of the house has gone down by $100,000. Maybe I have moved from being an employee to being self-employed, so I will no longer qualify for a loan under the bank’s lending criteria. I may not be able to withdraw that money again. It might have been more useful to have had the money sitting in a bank account at 6% or in an offset mortgage against the loan; I could then have drawn upon it any time”.
He explains further: “The decision between paying off your mortgage early and investing depends on your risk tolerance and investment strategy”. Investors with more flexibility and more financial resources might feel that there’s an opportunity for higher returns, but as Aseem warns, you should always bear in mind that riskier or more volatile investments fluctuate, and higher returns are by no means guaranteed.
Mortgage prepayment penalties
Some lenders impose prepayment penalties if you settle your mortgage early. As Aseem tells us, “Not all lenders charge this fee, but you should always ask your lender first.”
Strategic considerations
How would you use the extra money?
Before deciding to pay off your mortgage early, it is an extremely good idea to have a clear plan for the extra cash. Aseem Agarwal suggests, “If you’re paying off your mortgage early so you can have more cash flow after repaying your mortgage loan , you really should have an idea of how you’ll use or invest that extra money.” The last thing you do want that the money is sitting idle in a bank account and getting no or low return. With inflation, the value of those funds simply reduces. Using these surplus funds to save interest on your mortgage can be a better strategy.
Retirement planning
For most people, paying off the mortgage and retiring debt-free sounds pretty appealing. It can mean less worry and increased flexibility. “If your mortgage payments represent a substantial chunk of your expenses, you’ll be able to live on a lot more once that payment goes away.
If you’re intending to stay in your current home during retirement, eliminating monthly payments might be a good move. However, for some homeowners, their financial situation and goals might mean it is prudent to focus on other priorities while chipping away at their home loan.
The decision to pay off your mortgage early is not one-size-fits-all:
Paying off your mortgage early is an important financial decision. It requires careful consideration of your circ*mstances, financial goals, risk tolerance, and overall financial health. Aseem emphasises the need for a strategic tailored approach. “You could even consider a plan where you can both invest and pay down a portion of the mortgage,” Aseem says. “You don’t have to make an all-or-nothing decision.”
By weighing the pros and cons, understanding the potential impacts and consulting with financial experts like the team at Global Finance, you can make an informed decision that aligns with your long-term financial goals. We’ll help you understand your options, so contact us to talk about your mortgage today on 09 255 5500 or info@globalfinance.co.nz
The information and articles published are true to the best of the Global Finance Services Ltd knowledge. Since the information provided in this blog is of general nature and is not intended to be personalized financial advice. We encourage you to seek Financial advice which is personalized depending on your needs, goals, and circ*mstances before making any financial decision. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.
