What happens if I pay off my mortgage early?
Paying off your mortgage early may help you to rid yourself of debt sooner, save on interest and let you finally live in a house that is actually your own without having to worry about another home loan repayment ever again. Sounds pretty good right?
Well, there are a few different ways to scrape time off your loan like making extra repayments, raising your monthly payment amount or even refinancing your loan to a shorter term if possible (not to mention one with a better rate). What this means is that you could potentially save yourself thousands of dollars in interest and even take years off the life of your home loan!
We hate to break it to you though, this may not be the most money-savvy option, at least not for everyone.
While being debt free or shortening a 30-year loan may sound like absolute bliss, before deciding whether or not to begin the journey of paying off your home loan early, there are a few factors to consider, including your personal financial situation, that may help keep more cash in your pocket in the long run.
So, here are three essential questions you must ask yourself before you decide to pay off your home loan early:
Do I have other debt?
Having a financial plan that prioritises debt is essential to making money-smart decisions. In most situations, it may actually make sense to worry about your mortgage last because it will generally have a lower interest rate compared to other forms of debt. That doesn’t mean neglecting your home loan, or failing to make payments, it simply means setting up a scheme that means hitting all your payment targets and paying back debt in the smartest way possible.
Other forms of debt that may make sense to prioritise over extra home loan repayments (and usually have higher interest rates) include:
- Car Loans (Generally from 5%-15% interest)
- Investor Home Loans (Generally from 3.75%-6% interest)
- Personal Loans (Generally from 5%-15% interest)
- Credit Card Debts (Generally from 9% - 25% interest)
And aside from making repayments, there may be other options to tackling these kinds of debt including debt consolidation loans, refinancing your existing loan or balance transfer credit cards. Keep in mind though, balance transfer offers are temporary and interest rates tend to spike after the deal is over.
Will I have enough money after I make extra repayments?
You may have just come into a little extra cash and your savings account could be looking a bit healthier than it did before, but throwing all your money at your mortgage may not be the best idea if you end up needing that money later.
Life can be unpredictable, so having a 12-month emergency cash fund or a savings plan that could support you for general costs, or even in case of an emergency, is an important financial safety net to have first.
Similarly, if you have any expected big purchases coming in the future - like a wedding, a renovation or school fees - plan for them appropriately and prioritise saving over paying your back mortgage early, if you need to.
Everyone’s financial situation is different, and it may suit you to pay off your mortgage sooner, so getting a home loan that features a redraw facility or an offset account may give you the best of both worlds by letting you dip into your funds when you need. Ultimately, either one of these features could help you protect yourself so that you’re not left completely cashless and without options after you’ve made extra repayments on your mortgage.
Does my current loan allow me to make extra repayments?
In order to pay back your home loan early, you’ll probably want to take advantage of a home loan with an extra repayments facility. It is one of the most popular features for borrowers who are looking to take out a mortgage, as it gives them the option to speed up the process of paying off their loans if they want to.
So what exactly is an extra repayments facility? Well, borrowers can make extra payments on their home loan on top of their regular repayments. What this means is that the principal amount is brought down, which means you’ll end up paying less interest.
The good news is that extra repayments are available on a number of fixed and variable rate home loans, and often times they’re free! But do keep in mind that they are not always unlimited. Sometimes home loans with an extra repayment facility come with a monthly cap which limits the additional repayments you’re able to make.
And with so many lenders on the market, finding the right home loan can be tough, especially when it comes to paying back your mortgage early. So, to make life easier, here are some lenders that allow you to make free extra repayments when you take out a home loan with them:
- Athena - Variable Home Loan
- Homestar - Variable Rate Loan
- HSBC - Discounted Home Value Loan
- Loans.com.au - Smart Home Loan
- Tictoc - Variable Home Loan
- UBank - UHomeLoan
Want to know more about your options when it comes to choosing a home loan? Jump over to our Home Loan Hub for more articles, guides and tips to help you find what you’re looking for.