Paying Off Your Home Loan

Congrats on purchasing a home! You are one of the lucky ones in the financial position to own a home. No doubt it took a lot of hard work to get to this position, so well done! Now you may be wondering, should you be aiming to pay off your home loan quicker, or to put that money to use somewhere else? I will explore this question in more detail below!

Why You May Pay Your Home Loan Off Earlier

There are many reasons why you may pay off your home loan sooner rather than later. Below are a few examples:

  • You hate being in debt
    • If you are someone who is pretty risk adverse, having a big mortgage attached to your house may leave you feeling a bit ill.
  • You are putting money away to eventually use for renovations.
    • If you have a redraw facility, you may try to pump some money into your home loan to eventually withdraw to use on future renovations. Rather than taking out an extra loan, you could use extra money saved to fund these renovations, in turn also increasing the value of your house.
  • You don’t have any other money goals
    • If buying a home was the last of your money goals and you are content with everything else with your life, it may be worth just trying to smash down that loan to reduce the interest you are paying on your mortgage!

There are also many reasons why you may decide not to pay off your home loan any quicker. Below are a few examples:

  • You want to invest your money in higher returning assets.
    • Interest rates are at an all time low at the moment, so paying extra off your loan may only be saving you 2-3% per annum. You may instead prefer to invest in shares or another investment property to get you better returns. The Australian stock market typically returns about 8% a year on average which is significantly higher than the 2-3% you’ll save putting that money into your home loan.
  • Your property is, or will be, an investment property.
    • If you are currently living in a property that you plan to rent out, you may not want to pay off your home. The reason for this is that the interest you pay when you rent it out is tax deductible! Therefore it could be more tax effective to have a higher loan with the property and use your excess cash to invest elsewhere or save for another property.
  • You have other money goals that you want to achieve before paying off your home.
    • Again, if you want to save to buy a home or travel overseas, or have any other goals for your money, you probably don’t want to be paying off your home loan sooner. The mortgage is there for 30 years, you don’t want to waste all your time and energy trying to pay it down as quickly as possible when you can enjoy life. The mortgage repayments will never increase, so they will only get easier to pay thanks to inflation.
    • How inflation makes it easier- if your mortgage repayments were $1000/month in 2001 (20 years ago), that would be worth approximately $1600 today. Therefore, while money continues to rise in value, your repayments don’t, meaning they basically get cheaper and cheaper each year.

Still Unsure?

Why don’t you consider getting an offset account with your mortgage? Then you can have the best of both worlds! An offset account is an account that is linked to your home loan, and any money you have in it offsets the interest accrued.

For example, if you have a $300,000 mortgage and you have $50,000 in your offset account, you will only be paying interest on $250,000. This is the method I use, and allows me to save money on interest while also keeping the cash handy in case I need it at short notice. There can sometimes be fees associated with these types of accounts so make sure the savings outweigh the fees! The best way to do this is to go see a mortgage broker!

Final Word

What you decide to do with your home loan is personal and will depend on your own situation. It is important to consider all your finances and come to your own decision. Feel free to use this as a guide or a reference if you may not know what to do.

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