Should You Pay Off Your Home Loan Sooner?
The question of whether or not you should pay your home loan ahead of schedule is going to depend on the type of loan you took out, how many years you are into when it comes to paying off the loan and how big of a penalty you might have to pay to pay it off early (often called a deferred variable fee.)
If you have a variable rate home loan then then you may pay off the mortgage in full at any time, however aside from the usual deferred variable fee some lenders have a policy that you have to pay additional fees if you pay off the loan early.
If you have a fixed rate loan some lenders will allow you to pay off an additional amount annually. However if you want to pay it off in full it can be expensive as usually you are charged an administrative penalty as well as a repayment adjustment fee.
One tact is to switch your fixed rate loan to a variable rate while interest rates are lower. However once again expensive terms and conditions may apply depending on what you agreed to in the loan. There are three basic ways to do this.
- You can
- Make extra payments weekly or fortnightly so that you are paying an extra month of your mortgage off each year
- Negotiate to make larger payments or
- Offer to make periodic lump sum repayments.
The benefit of paying off an extra month of your mortgage every year is the capacity to build equity in what you own faster so that you can save money instead of spend it on long term incurring interest. If you make larger repayments or whittle down the principle with occasional lump sum payments you will also end up owing less and owning your home sooner.
The only situation in which these tactics may not save you money is if you are paying very high interest rates on smaller car loans or credit card loans in which case it makes more sense to pay those loans down first and then pay down your mortgage. It may also be of benefit to merge your personal loans and your home loan into one package to reduce the amount of interest paid.
Keep in mind that new home loan products come into existence all of the time in the Australian banking industry and that a qualified wealth management expert can help you stay abreast of the latest developments when it comes to helping you make the moves that can save you thousands of dollars in interest. A wealth management expert, for example a financial planner, can also demystify the fine print in your mortgage loan agreement and tell you how and when you should pay more of your mortgage off. Your overall debt load will also come into consideration as he or she gives you this advice so that all of your financial moves make the most profitable sense.