While most of us aim to repay our mortgage soon, there are instances when doing so does not make sense. We show you what these instances are in this article.
More often than not, it makes sense for you to pay off your mortgage sooner. After all, you gain even more financial freedom once you have paid off one of the biggest debts in your life. There are instances, however, when paying extra on your loan repayments may not make sense or may be practical. This is what this article is all about.
Here are some instances when you should avoid making extra repayments on your mortgage:
- When your type of loan prevents you from doing so. If you have a fixed rate home loan, chances are that you have limited flexibility when it comes to making extra repayments. There are lenders, for example, that would penalise you if you pay over and beyond the repayment limit. Switching to a variable rate loan would usually remove this limitation.
- When you have debts with higher interest rates than your mortgage. While you might prefer to focus most of your funds on repaying your mortgage over your other debts, you need to consider if you have debts with higher interest than your mortgage. If you do, make it a point to pay those off first or move to a product with lower interest. Or if you are having credit card trouble, it would be better to pay it off first too. This would result in you having a better overall financial health, which enables you to handle not only your mortgage repayments but your other debts as well.
- When you are about to retire. In case you are nearing retirement, earn over $37,000, and are not making any salary sacrifice on your super, you would do better by directing your extra funds to your super instead of making extra mortgage repayments. You can then make a lump sum withdrawal on your super contributions and use that money to pay off your mortgage. Doing this not only enables you to close your mortgage eventually, it also enables you to make tax savings with your contributions.
- When you took out an investment loan. If you are currently repaying the mortgage for both your home and your investment property, paying more on your investment might not make a lot of sense. Rather, you would be better off making extra repayments on your actual property. You can do this by converting your investment property's loan into interest-only and then use the extra funds to make extra repayments on your own home.
- When you are looking to invest. It goes without saying that investing your extra money is a great way to grow your wealth. In that case, it would be more practical to invest your extra funds somewhere else, while meeting your home loan repayments, of course. While this means you will not be able to repay your loan fully as soon as you wish, that decision will pay off once you reap the rewards of your investment.
Naturally, all of these would depend on your financial situation and personal circumstances, as these would play an important role in determining whether or not you should make it a point to make extra repayments. If you do not have debts, already have a significant amount of investments, and have the appropriate type of loan, then it would be a sensible decision to make extra loan repayments.
Finding the Right Mortgage
It is important to find the right mortgage, whether or not you wish to pay off your home loan sooner. Here are some ways on how you can do this:
- Compare loans. This should be your first step when choosing a home loan. You need to compare loans offered by both bank and non-bank lenders. This enables you to find which loan is appropriate for your needs and personal circumstances. Thus, it is important that you get in touch with a mortgage broker such as Rate Detective. The reason is that brokers can provide several options at once, unlike banks and most lenders which can offer only their own mortgage products.
- Determine your budget. Your budget should determine the type of loan you should take out. It is therefore important that you find out how much money is coming in and out of your household every month. Not only will this tell you how much you can spend, it would also help you choose which regular expenses you can reduce or do away with in order to give more room for your mortgage repayments.
- Seek professional help. Aside from mortgage brokers, you might also need help from other professionals such as an accountant and a lawyer. Your accountant can help you with matters related to your finances, such as your budget and finding out where you can make savings from taxes. Meanwhile, your lawyer could help you review the terms and conditions of the loan so you can understand every detail before you put your signature on the dotted line.
On Comparison Rates
In the previous section, we told you about the importance of comparing loans when taking one out. You will be able to do this effectively with the help of comparison rates. A comparison rate takes into account the interest rate, the term of the loan, as well as the associated fees and charges. Thus, you will be able to have a fairly accurate assessment of whether or not the loan is right for you.
You may use our comparison rate tool on this page to view comparison rates of over 30 lenders across Australia. Simply enter the necessary details on the form and then click on the 'Compare' button. After that, we will send you to a page showing the comparison rates of various lenders.
Keep in mind, though, that the rates you will see are just estimates. You will still need to speak with one of our mortgage brokers to get more accurate figures. They will do so by assessing your personal circumstances as well as your finances to help match the right home loan products for you. So please fill in the comparison rate tool on this page to get started.