Mortgage is one of the most common loans that people get to finance their needs. It is a home loan that usually takes years before it is repaid. However, if you have the financial capability, paying your mortgage in full offers many benefits. Read on to know how finishing your mortgage early can positively impact your finances.
What Is a Mortgage?
A mortgage is a type of loan that uses real estate or personal property as security. This means that if you lose the capability to pay the money that you borrowed, plus interest, the lender has the right to take your property.
Fixed vs Variable Rate Mortgages
A fixed-rate mortgage has an interest rate that is locked for an agreed period of time, meaning there will be no sudden increase in payments that might ruin your budget for the month. Depending on your budget, this usually takes one to five years or even as long as 30 years. This is a good choice for first-time homebuyers because it allows them to adjust to the life of having loan repayments. It is also for investors who want consistent positive cash flow.
Opposite to the fixed-rate mortgage, a variable rate mortgage imposes an interest rate that can change over the course of your loan. In exchange, this type of loan has more flexibility than the fixed-rate mortgage which usually has restrictive or limited features. It also has a wider range of repayment options and lets you make extra repayments that could help you finish your loan sooner than the agreed duration.
Mortgage Loan Interest Rate in Australia
As of December 2021, the average interest rate for variable rate mortgage is 3.93%, while a 3-year fixed mortgage has 2.93%
Benefits of Paying Off Your Mortgage in Full
Aside from the peace of mind brought by having no more home loans to think of, there are other advantages to paying your mortgage in full. Here are some of the positive impacts of finishing your mortgage early.
Your House Is Instantly Secured
Having a home loan means that your home is always at risk. Lenders can easily take away your hard-earned dream house in a blink of an eye the moment you lose the capability to pay for it. By finishing your home loan early, you immediately gain full ownership of your property.
You Can Focus on Your Other Debts
By paying a mortgage in full, you are freeing yourself from your monthly home loan payments. This means that you can now have extra cash that you can use for paying bills, credit card balances, college loans and other debts. You can now cross mortgage off your list of things to worry about every month.
You Can Save Money From the Interest
One thing about home loans is that the longer their payment term is, the more you pay in interest. Some home loans even have high interest rates which can hurt your budget even further. If you have a mortgage that lasts for a number of years, the amount of interest that will pile up can lead to thousands of dollars. If you eliminate your home loan as soon as possible, you can save more money for investments, travel, retirement, important purchases or other long-term plans.
Disadvantages of Paying off Your Mortgage in Full
There are also downsides when paying off your mortgage early. Here are some of them:
Home Loan Prepayment Penalty
This penalty is a fee that you have to pay the lender when you sell, refinance or pay your mortgage in full within the first years of committing to the loan. This penalty is a way of protection for lenders against losing interest income. Not all lenders have this, but there are some who do, so you should always ask your lender first if it has a prepayment penalty.
You Can Earn More By Investing
Mortgage interest and stock market returns are always changing. The numbers may be pretty low right now, but they can be higher than you’ve expected in 10 years. You might lose a big opportunity if you choose not to invest.
It Can Hurt Your Credit Score
If you have different credit types, such as a car loan, credit card and a home loan, paying off your mortgage in full can cause a drop in your credit score.
You Might Lose Your Mortgage Interest Tax Deduction
By being a homeowner with monthly home loan interest, you can claim the amount you pay in mortgage interest to decrease your taxable income. If you get rid of your monthly home loan by paying it off, you will lose this privilege.
You’ll Have Less Liquidity
Liquidity refers to how fast an asset can be converted into ready cash. Homes lack this. You cannot immediately sell a house for cash. Finding a buyer for your house can take months, and you still have to wait for the deal to be closed. When you pay off your home loan in full, you are spending a lot of money on your home in one go and leaving yourself with less cash.
Paying off your mortgage in full can give you peace of mind and an extra budget that you can spend on something else. However, it also has negative effects, especially if you have a home loan prepayment penalty and credit scores. So, is getting off your mortgage early a good idea? Yes, but always consider the situation and important factors before doing so.
If you are unsure of what to do, seek the advice of a professional home loan mortgage broker. If you need one, Golden Eggs is happy to serve you. We have access to an extensive panel of lenders and offer a wide range of loans that can make a positive difference in your future. We will guide you throughout the process, and we will explain all the benefits and risks of each option. We also have a free-of-charge annual review for our clients to ensure that you, your loan and your property are doing great. For more details, call us on 02 8095 9251.