Does paying off your mortgage early make sense?
Most experts will tell you to pay off your home loan as soon as possible to reduce the amount you pay in interest. Other than the obvious, there appears to be many reasons why people do it.
We ask a financial planner, a consumer and a lender what they think, and this is what they say.
Financial Planning Association of Australia spokesman and principal adviser at Windsor Advisory, Andrew McGrath, says some of the benefits of paying off your mortgage early include:
– Enforced savings.
– Avoiding interest you would otherwise pay if you did not pay off the mortgage (subject to economic costs which may be payable for early payment).
Asked what advice he would give someone who has (or almost has) paid off their mortgage early and wants to buy an investment property, McGrath says:
If possible, set up the investment debt as interest only and pile any surplus cash flow into the non-tax deductible mortgage debt before any dollar of principal is paid off the tax-deductible investment debt.
McGrath urges borrowers to have a contingency plan to meet ongoing borrowing costs/expenses “in the event you cannot work because of illness or injury etc”.
“Also, ensure your investment time horizon is medium to long term when using debt. And, ensure risk tolerance is sufficiently robust to allow for heightened risks associated with debt.
“You should model affordability on interest rates that are 2 to 3 per cent per annum higher than the present rates at the very least to ensure affordability remains if interest costs were to increase.”
Being smart about your money is vital. Photo: Stocksy
What the consumer says…
We ask Melbourne couple Emma and Rick Blackhurst if they think it makes sense to pay off a mortgage early. This is what they say.
Emma: “Absolutely. It worked for us.
“In about 2001, we took out a $185,000 mortgage over 30 years on our first home and we were determined to pay it off as quickly as we could while we were on two incomes. We gave ourselves $100 each a week in spending money, and after bills, poured the rest onto our mortgage.”
Rick: “We used our mortgage account like a savings account and for about a year or so we were able to throw an extra $1000 a week onto the mortgage. We’d watch it adjust online, taking years off the term of the loan as we poured money into it. It was a big incentive, watching those years come down. We managed to reduce our mortgage from 30 to 10 years and established enough equity to buy an investment property.”
Emma: “It took the pressure off and allowed me to take time off work when we had our two children. It allowed us to enjoy our children without having the stress of meeting mortgage payments each week.”
Rick: “It gave us freedom and options. Because we were so far ahead on our mortgage repayments, I was able to quit my job and start my own business. There’s absolutely no way I would have been able to do that otherwise, because Emma was a stay-at-home mum at the time.”
Rick’s cost-effective kitchen and bathroom renovations business is Sustainable Makeovers as seen on the hit TV series Selling Houses Australia.
What the banks says …
NAB retail general manager for Victoria West and Tasmania Matthew Ricker says paying off your mortgage early “absolutely” makes sense for the following reasons:
“The simplest being we borrow money to buy something and own it so the sooner we pay it off the quicker we own it outright. The second reason is that it gives us capacity to create wealth beyond the ownership of our family home, we can borrow to invest and that borrowing can also be more tax effective,” he says.
“The great Australian dream is to own a home, when we pay off our mortgage we can truly say we own our home! I’ve spoken to customers when they have made their last mortgage payment and knowing you have a new sense of financial freedom is incredibly rewarding.”
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