Is Early Repayment Right For Your Mortgage?
If you have money left over at the end of each month, or have received an unexpected lump sum, you may be thinking about paying off your mortgage early. You can save large amounts in interest and potentially cut your mortgage term by years but it’s not always the best option.
So what factors do you need to consider before deciding whether to clear your mortgage early?
Does your mortgage allow for overpayments?
Not all mortgage products let you overpay and some will charge you for doing so, but many allow borrowers to overpay up to 10% of the outstanding mortgage with no penalties. If you’re not sure about the terms and conditions of your mortgage, get in touch with your lender or check the original documentation.
Are you enrolled in any pension schemes?
If you’re currently paying into a pension scheme it could be more beneficial in the long run to increase your contributions because of the tax relief offered by the government. If not, consider using the extra money to start saving tax-efficiently for your retirement.
What are the current savings rates?
Although savings rates have been extremely low in recent years, there may be a fixed rate or longer term savings account that offers a higher rate of interest than that charged by your mortgage lender.
Do you have significant unsecured debt?
Paying off more expensive debt such as credit card and store card balances, and unsecured loans, is always a good idea if you have residual income and should be prioritised over paying extra sums to your mortgage. Once this type of debt is paid off you’ll automatically increase the amount of money you have available each month and can then consider overpaying your mortgage, which is a lower cost debt.
Do you need extra life insurance?
You probably had to take out a life insurance policy to cover your mortgage loan amount, but it might only cover death rather than illness or disability. It’s a good idea to review your insurance needs from time to time – you may want to change from a fixed period that covers your mortgage term to a ‘whole-of-life’ policy where the timing of a payout isn’t restricted, for example.
Do you have an emergency fund?
If you lost your job, could you pay the bills for at least six months? If not, it would be worthwhile building an emergency fund with your residual income rather than paying down the mortgage.
A mortgage is typically the largest debt that people take on. It represents a huge financial commitment whatever your stage of life, and paying it off early always seems a very attractive option at first glance.
Before you do, though, consider some of the other areas where the money could be put to better use, at least for a while – then you can go ahead with confidence and potentially shave years off your mortgage term.