April 07, 2015
Owning a home has long been the great Australian dream. But many people ask the question – is it wise to pay off your mortgage as quickly as possible?
Interest rates are currently hovering at historical lows and with the Reserve Bank leavings rates untouched again for the 2nd consecutive month in a row many borrowers are taking the opportunity to pay off their mortgage faster and own their property outright sooner.
But while paying off your mortgage faster has always been the ideal goal, there are some instances where paying off your mortgage sooner is not actually in your best financial interests.
Melissa McCullock, mortgage broker with Mortgage Choice in The Hills (Perth) highlights four reasons paying off your mortgage sooner is not actually in your best financial interests.
Here are 4 instances you should keep your champagne on ice a little longer...
1 - You may incur penalties.
Sometimes you can be hit with an ‘early termination fee’ or ‘exit fee’ when you pay out a loan early .
While exit fees on all new loans were banned on 1 July 2011, loans that pre-date this time may still incur this type of fee. Make sure to check with your lender or broker first.
Alternatively, if you are in a fixed rate home loan, paying your loan out early could cause you to be charged a 'break fee'.
As a general rule of thumb, the more interest rates have dropped since you took out your fixed rate home loan, the higher the break fee will be.
Of course, you won’t know exactly how much these fees will be until your credit provider tells you – so make sure you find out what you could be up for before making any final decisions.
If you are in a fixed rate home loan call your bank to ask for your 'payout figure'.
2 - You may be paying off the wrong debt.
There is such a thing as 'Wrong Debt' we hear you say.
Well everyone generally has a couple of different debts, therefore its in your interest to pay out the debts with the higher interest rates.
For example, if you have a credit card with an interest rate of 19% and a home loan with a 5% interest rate... it makes sense to actually put any additional money you have towards the credit card debt first (until it's paid off and then to go back to paying off the home loan on your home).
If you're finding it hard to pay off your credit card (or any other high-interest personal debt) and at the same time make your home loan repayments - you have the option to consolidate all your debts into the one home loan. Banks refer to it as debt consolidation.
3 - Investment Loans
If you have a mortgage on your owner-occupied dwelling as well as a loan for your investment property, it often doesn’t make sense for you to rapidly pay down the debt on both properties at once. Instead, you should put any additional income you have towards the mortgage on your owner-occupied property. Not only will this allow you to pay off the pool of debt you have between the two properties, but there are certain tax benefits associated with investment loans that you’ll still be able to take full advantage of.
4 - Retirement Plans
While many of us would ideally like to have our mortgage paid off by the time we reach retirement, paying off your mortgage is often not the most important thing you should be doing.
If you’re not making the highest salary sacrificed super contributions possible, it may pay to do this rather than plough your additional funds into your mortgage. Why? Well, making salary sacrificed super contributions offers a simple way to save on tax and build wealth. It involves having part of your before-tax salary paid into your super rather than taking the money as cash in hand. These contributions are taxed at 15%, which is likely to be below your marginal tax rate (which could be as high as 46.5%), so more of your money goes towards growing your super rather than paying the tax man. Then, once you retire, you can draw down the funds you have in one lump sum and use it to pay off your mortgage.
Have more questions?
If you have questions about any of the issues covered in this article or would like to discuss your personal circumstances and home loan needs, call Melissa McCullockof Mortgage Choice in The Hills for an Obligation Free Chat - either on the phone (08) 9291 8874, or by email at firstname.lastname@example.org.