Some of us pay off our home loan as a top priority, while others are happy to stick with the 30-year repayment term. Which is the better option?
If you are the type of person who hates debt, you probably think it is a no brainer to pay off your mortgage quickly. After all, the sooner you pay it off, the more you save in interest repayments.
However, if debt doesn’t bother you, you might argue that it’s better to let your home loan runs its course. By not funnelling all your money into the loan you have cash in hand to spend when needed, such as to invest in property or take a holiday.
There is no right or wrong answer, but it is important to examine your reasons for wanting to pay off your loan earlier. Consider these issues when making your decision and have a chat with us if you need further advice.
Extra repayment penalties
Depending on the type of home loan you have, sometimes the penalties of making extra repayments outweigh the benefits. While exit fees on new loans were banned from 1 July 2011, older loans may still charge these fees for paying off your loan early. Fixed rate loans can also include penalties in their terms if you make extra repayments towards your loan above certain limits.
With home loan interest rates at a historic low, there is probably a vast difference between the interest rate you pay for your mortgage compared to the interest rate you pay for your credit card or personal loan. Your debt should be paid off in order of priority – from the highest interest rate to the lowest. If your home is listed as security for any debt, it’s doubly important to prioritise paying off this debt first.
Rainy day fund
It can be dangerous to put all your spare dollars on your mortgage if you don’t have enough savings set aside for emergencies. A good option is to use a mortgage offset account, which will offset the amount you owe on your loan, only charging interest on the difference.