A home is the best investment you can make, and the prospect of paying off your home loan quickly and obtaining complete ownership of your home can be tempting on both a personal and professional level.
But is it in your long-term interests to do so?? There are pros and cons to paying off your mortgage early. We explain this in more detail.
Disadvantages of paying off your mortgage early
- It makes more sense to pay off other loans early.
- You lose a source of funds (such as access bonds).
- You may end up owning a home but being unable to afford maintenance.
- You're putting your eggs in one basket rather than diversifying your investment portfolio.
- Tax implications.
Why it makes more sense to pay off other loans first
Home loans have the lowest interest rates out of the various loans you can acquire. You'd be better served paying off credit card debt or a vehicle loan, for example.
Losing the source of funds
With an access bond, any extra repayments you make into your home loan double as a source of funds you can borrow from.
Furthermore the value of your home increases over time, granting more equity that you can draw on. For example, if your home loan is still open, you can draw on the funds contained there to perform alterations on your home.
So why incur such an expense as to pay off your home loan early, when you have the ability to borrow against it should you need to?
Is it better to diversify your investment portfolio?
The funds you'll use to pay off your mortgage early could have been used instead to make investments in other areas. Now all your investment will be in the home, meaning you're putting all your eggs in one basket.
Tax implications of paying off your mortgage early
Interest on a home loan is tax deductible. Paying off the loan early means you lose that tax shield.
Advantages of paying off your mortgage early
- You save money on interest
- You can sell your home to fund a new property purchase, instead of having to take out a second bond.
- Eliminates risk.
- Frees up disposable income.
The pandemic showed that financial risk could be just around the corner. Paying off your mortgage early means you won't find yourself in a situation where you're suddenly unable to afford the monthly repayments.
Life after the mortgage is paid off
With the mortgage paid off, you've freed up funds to make other investments.
A massive weight will be lifted from your shoulders, and you'll be able to look forward to a debt-free future.
If you're nearing retirement, you've now eliminated a significant monthly expense.
So should I pay off my mortgage completely?
As with all things, it depends on your situation. But financial advisors generally advise against it because you lose out on the tax deduction and the home equity.
A middle ground approach is to put extra payments into your home loan each month. This will save you in interest in the long term, without removing all the "good debt" benefits of the home loan.
You can use our Extra Payments Calculator to determine whan an extra payment into your home loan will save you in the long run (and how much it will reduce your home loan term).
Another way to save on your home loan: Apply for multiple home loans
You can save on interest rates by simply acquiring lower interest rates. We at ooba Home Loans can help you with that, as we submit your home loan application to multiple banks on your behalf.
This will enable you to compare deals offered by the various banks and choose the one with the lowest interest rates.
We also offer a range of tools that can make the home buying process easier. Start with our Bond Calculator, then use our Bond Indicator to determine what you can afford. Finally, when you're ready, you can apply for a home loan.