Wednesday, October 16, 2019

Should You Focus on Repaying Your Mortgage Sooner?

Finance Gurus usually advocate paying off your mortgage as soon as you can because it saves you a lot of money on your interest rate in the long run. Paying off your mortgage early also opens up some options for your future investment. Also, it feels great to own your home 10-15 years earlier than you expected.

But here is a word of caution for everyone who wants to put their extra money to good use. Repaying your mortgage early is a good option, but it’s not always the best one. Here are five reasons why you might want to consider other options than paying off your mortgage early.

1. You have other debt with higher interest rates

Most probably your mortgage is your biggest debt so far so it makes sense that you want to work at reducing it. However, if you also have a personal or a credit card debt, chances are that they are subjected to much higher interest rates.

Usually it makes sense that you want to pay off your highest rate debt first (usually your credit card) as once this is paid, you will have more to put towards the rest.

2. You Might Face Early Repayment Penalties

You should check your loan terms carefully to see what fees you will have to pay if you repay your loan early. Sometimes mortgage companies charge huge penalty fees to discourage people from paying off their loan early. You should check this from you lender before making a final decision as some of the mortgage lender companies have removed this penalty policy altogether, even for their older contracts.

3. You want to maximize retirement contributions

 If retirement savings play a big role in your retirement plan, it might be a good reason to maximize your retirement contributions before making extra mortgage repayments. This is partly because of the tax benefits, and partly because of annual contribution caps.

Currently, people may contribute a maximum of $19,000 to your 401(k) pre-tax. But, if you put all of your money into paying off your mortgage at 3% but your 401(k) is returning 7%, it makes more sense that you put as much money into your retirement as possible.

4. You’ll get more from other investments in the long run

Like I have mentioned before, with mortgage interest rates as low as they are currently, your money may earn more benefit from other investments versus repaying your mortgage.

For example, if your home loan interest rate is 3.75% but investing in a duplex yields 6%, it may be better for you to put your money into a duplex versus repaying your mortgage.

This is one of the many benefits of working with a good financial advisor. If you don’t have one already, you can reach out to us and see our recommended financial advisors.

5. You’ll need the cash for something else soon

If you know that you will need some money in the coming few years, perhaps to start a new business or to pay university fees, do you really want the equity tied up in your home? If you can’t access the cash from somewhere else, you will end up having to remortgage, which defeats the purpose. Instead you can consider a savings account, money market account, or other investment where the money isn’t tied up.


Finding Balance

Some people get so obsessed with paying down their mortgage as soon as they can they don’t consider other investment options, while other people just have their hearts set on accumulating more and more investments despite the risk exposure.

In both extreme scenarios, the individual is oblivious to the bigger picture and doesn’t think much about would actually work best for them. As you can see, there are a lot of factors to consider in this decision, and there is no single right way to go about it, it’s a highly customized process.

Therefore, make sure that you take the time to find the right balance between debt repayment and new investments so you can ensure a financially secure future for both you and your family.

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