Should I Pay Off My Mortgage?
By paying off your
mortgage can, over the long term, have a serious impact on the
money in your pocket. A mortgage is a debt. It may have different characteristics
to loan borrowing or credit cards but think of it as a debt like any other. If you
take steps to reduce this debt it can save you significant sums of money.
Take an example of having $100,000 remaining on a 5.5% mortgage over 20 years. If
you repay just an extra $100 a month, this will clear the mortgage in just 16 years,
saving you $14,500 in interest.
But it’s interesting that the same $100 a month in a savings account at a high rate
of 6% interest would only earn you around $9,500 over the same time period. So,
for those that can afford to pay extra off their mortgage, it mathematically makes
sense.
If you are thinking about remortgaging, by simply having a smaller mortgage can
mean you may get a better deal. So if you have got any savings, provided you can
spare them, use these to go towards significantly lowering your mortgage borrowing.
This will probably get you a cheaper borrowing rate and this can be worth doing
even before pay off more expensive debts.
If you had...
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$10,000 Mortgage Debt
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at 6%
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Annual Interest Cost $600
|
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$10,000 Saving
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at 4%
|
Annual Interest Earned $400
|
Pay off the debt with the savings and you are $200 a year better off!
So based on the calculations, if your mortgage rate is higher than your savings
interest, don’t save your money, overpay your mortgage.
Alternatively, you may want to see if there are other ways to cut the cost of your
mortgage so it could be worth looking into swapping your mortgage to a lower interest
rate deal. But beaware as these deals often penalize overpayments or only allow
overpayments up to a certain amount per month without penalty.
Be aware of when your mortgage company adds interest. It will usually be daily,
monthly or annually, but which one makes a big difference. With monthly and especially
annually calculated mortgages, it’s vital to pay your extra repayments at the most
beneficial time. The money you put in to overpay your mortgage only counts after
the calculation is made. Don’t put in your money too early as it won’t have the
impact that you expect it should have and you’ll miss out on any interest you could
have earned in a savings account. Contact your mortgage lender to find out when
your interest is added.
Reasons You Should Not Pay Off Your Mortgage
Are you allowed to repay your mortgage more quickly? As mentioned above, mortgage
lenders may penalize you for paying off your mortgage early, especially if you are
locked into a special deal such as fixed interest rate repayments or a cheaper rate.
However, provided it doesn’t cost you anything to swap lenders, then move to a lender
that is more accommodating for your financial needs.
Can you get to the overpaid money if you need it? As soon as you put it towards
you mortgage it is gone. You are effectively locking money away which means you
can’t use it in 6 or 12 months time, if you really need it. Simply don’t pay off
more than you can afford. It would be foolish to leave yourself with no backup savings
or even go into debt. It’s worth having 3 to 6 months spare cash readily available
for an emergency fund. This needs to cover at minimum your regular monthly mortgage
repayments. If you lost your job, at least you have breathing space while looking
for another job.