A mortgage means different things to different people and can even mean something different to the same people if they’re at different stages of their life. A common question through all those stages though for many different people is “When is the best time to pay off a mortgage?”
Because the answer varies depending on which stage in life you’re at I wanted to do a detailed guide for each of these general stages so that no matter who you are or at what stage of life you’re in, you can get some context and learn whether or not it really makes proper financial sense for you personally to mutilate that mortgage.
So let’s dive into the various stages that are out there and find out what the correct MTM path is for each of them.
I’m Just Starting Out!
Let’s start with the case where you’ve just moved into your first new home and are wanting to learn more about this new “mortgage thing” you’re responsible for and how best to pay it off.
Unfortunately when it comes to most first home buyers they put a huge amount of effort into saving up the initial deposit, searching for and buying that new home that they don’t really continue that effort through to the mortgage.
It’s also hard as there’s always a ton of things to do when you first move in from unpacking to getting utilities hooked up and even just learning how everything all works whether it’s the new oven or the mortgage repayments.
So what I’d suggest is to not worry too much about it for the first few months. Normally your mortgage will be put on the default 30 year time frame which is horrible… but fine while you get your bearings.
After about 2-3 months of living in your new home and making repayments – possibly even sooner – you should have a good handle on everything. You should know how much your repayments are, how you’re coping with them, what many of your bills are month to month and also what your payment goal is.
At this point I’d wholeheartedly recommend digging straight into The Official Mutilate The Mortgage Strategy and get started killing that mortgage ASAP. The sooner you setup your automatic extra repayments the sooner you’ll have it all paid off!
As a new mortgage owner you can also check out our huge array of free guides that cover everything from cutting expenses to key life advice in the FREE GUIDES section of our new menu.
I Have Other Debts / Credit Cards
If you fall into the unfortunate category of not only having a mortgage but also having other debts such as a car loan, HELP, credit cards etc and are trying to decide which one to attack first then this section is for you.
The pure mathematical approach to this question is quite simple. Attack the debt that has the highest interest rate first and then work your way down. If you have a $2,000 credit card debt at 20% interest and a $300,000 mortgage at 4% interest you’re by far better off throwing everything you’ve got at that credit card debt first. After that’s paid off then you redirect that money towards the mortgage as it’s the next highest interest rate.
I understand that many people will have other, usually emotional, reasons for wanting to pay off other debts first but there’s really no reason to do this. It only costs you money and slows you down as you’re letting the higher interest rate debts rack up even more that you’ll have to pay off.
This is one of the rare cases where I’ll actively encourage people to pay off something that’s not their mortgage as it makes little financial sense to do otherwise. Most car loans, personal loans, credit cards and so on all have higher interest rates than a mortgage. Occasionally you can get interest free periods on some of them but this should just give you even more reason to focus on paying them off before it ends.
Another potential option is that you can roll other higher interest debts into your mortgage – which will usually have a lower interest rate – and save yourself money. So if that same $2,000 credit card debt is being a real pain to pay off, you might be able to convince your bank to let you bump your mortgage up to $302,000 and then use that $2,000 to get rid of the credit card debt. Now you’re paying the $2,000 debt back at 4% instead of 20%!
Should I Pay Off My Mortgage Or Save For X?
In this case you’re again paying off your mortgage normally but luckily have some spare money still left over! Ideally you shouldn’t have any other debts and so you’re trying to decide whether you should commit this extra money to the mortgage or maybe start a savings account for a holiday, school fees for your children or whatever it might be.
If you’re finding that money is slowly piling up even with your accelerated mortgage repayments first of all, lucky you! It’s always nice to be doing well and I’m sure it’s come from doing lots of good hard work.
Just for illustrative purposes let’s assume you have that same $300,000 mortgage at 4% and you’re trying to decide what to do with $10,000. You have a couple of options:
- Throw it all at the mortgage
- Spend it all on X
- Use the 80/20 rule
If you’re just wanting to buy a certain “thing” or holiday then I’d likely suggest the 80/20 rule. Put 80% of it – in this case $8,000 – towards your mortgage as it’s the sensible, financially correct thing to do. Then use the remaining 20% or $2,000 to splurge a bit. Buy that cool new toy, go on a small trip somewhere.
It’s important for motivation reasons that you continue to reward yourself for working hard and paying off your mortgage quickly as otherwise it’s very easy to stray off the track. Using 80-90% of the money to continue to attack your mortgage deals a good, proper blow to it and will obviously reduce your loan term. But at the same time you give something back to yourself which helps to make your life liveable and enjoyable long term.
If you’re instead thinking about saving for a more long term goal such as high school fees for your children then first check if you have a Redraw feature or Offset account. If you do, there’s no reason not to put all of it in the mortgage. You can have that $10,000 sitting in your mortgage or in the Offset account meaning you’re paying less interest.
As you build that amount up (say to $50,000 over a few years) it offsets even more interest. Then when you need the money once you child begins high school you can draw down on it gradually and still use it for its intended purpose.
This way you get your cake and eat it to. You are preparing early for a large expense but are still paying as little interest on your loan as possible.
Should I Pay Off My Mortgage Or Put It In An Offset Account?
As I’ve stated before, Offset Accounts are a waste of money for most people. This is because most mortgages allow you to redraw money from them without any cost. So you can choose the cheaper, no-frills mortgage plan with the lower interest rate and still put money in and take it out at any time.
So in this situation it really doesn’t matter that much whether you put your spare moolah in your mortgage or your offset account. If I had to recommend anything, it would be to put it in your mortgage and then call up your bank to investigate switching to the no-frills mortgage plan so you can get an even lower interest rate!
Should I Pay Off My Mortgage Or Invest?
And finally we have the situation where once again you’ve already been paying off your loan for a while and have spare money to pay even more… but are trying to decide whether you should do that or maybe invest it or even buy another property.
There are lots of arguments out there for both sides of this fence. I’ve also covered this in considerable details already under the piece Should I Pay Off My Mortgage Or Invest? As such I won’t say too much more about the topic. If you’re in this case please go read that piece instead :-)
The core reason for this is that you should think about your “repayments” as a more general thing. It’s not just the amount you can put towards your mortgage but the amount you as a household can save and put towards any goal.
For now that goal is paying off the mortgage. Later it might be saving for retirement. Earlier it might have been saving for a deposit. Regardless of where you’re directing that savings amount, you should always be trying and aiming to increase it over time.
Find new income sources. Get that raise! Cut those useless expenses! Push!
Having huge wads of cash every pay at your disposal is something that will serve you immensely well over the course of your life. Whether it’s used for a mortgage, a holiday or a child’s education everyone can always use more money, so make it a practice to regularly invest your time in increasing that ability and prosperity will never leave your side.
The benefits include: 1) How to pay off your mortgage faster than 99% of people with one hour a month of work 2) How to get rid of your debt and have the freedom to spend money on the things you love, guilt free 3) Clear outline of how to setup your expenses, mortgage and general finance 4) How offset accounts work and how to get the same result without being gouged by the big banks 5) How to cut through the crap and focus on the things that truly matter when taking down a mortgage 6) How to adjust the strategy so it works for you, even if you have kids, even if you only have one income 7) How to do all of these things and maintain a normal social life (and never be cheap).