Given the core purpose of this site is to help people learn How To Pay Off Your Mortgage Faster, you might assume our answer to “Should I pay off my mortgage?” would always be a big yes! But. There are actually many legitimate reasons why even we would recommend against it, so let’s explore these points and make sure you know how to choose the right path for your situation.
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When NOT To Pay Off Your Mortgage
First let’s cover some quick reasons why you shouldn’t pay off your mortgage faster:
- You have other higher interest debts. Credit Card or other loans that have a higher interest rate will build up interest faster than your mortgage, so you’ll save more money focusing on these first. If you have a $2,000 credit card debt at 8% 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. There are also services which allow you to roll higher interest debts into your mortgage saving you money
- You have other financial obligations. If you have other big ticket items coming up soon like needing to replace a car, new hot water system or school fees you might want to focus on them first, then come back to your mortgage after
- Your mortgage lender / bank doesn’t allow for more frequent / higher repayments. Quite often, especially with fixed interest loans, your lender or bank might not allow you to make higher or more frequent repayments. If they do, there could be a limit (for example $10,000 per year) so make sure you’ve confirmed with them that what you’re planning is allowed and that you won’t be penalised
If you’re clear of these main points, then here are a few more considerations you should well… consider.
Mortgage Payoff Considerations
Investing & Retirement Planning
Are you young or nearing retirement?
Investing in your retirement account or the S&P500 has historically proven to be the higher earning result. Mortgage interest rates, especially lately, are just too low to compete when taken over a 5-10+ year time frame. As such, even when taking taxes on investment earnings into account, the maths still says you’ll end up making more by directing that extra money towards long term, stable investments.
That being said, no one can give you a guarantee when it comes to investments, even ones that have been returning consistently for decades. Whether it’s shares or even other investment properties, the markets are out of our control at the end of the day. Further contributing to this decision is that loan interest rates have been at historic lows for many years now. They can always go back up, but again, it’s a decision that’s also out of your control.
As a general rule, most financial planners recommend that if you are nearing retirement you should focus more on your mortgage and reducing other debts. This is because it reduces the amount of debt repayments and risk you’ll have after you stop working.
If you’re younger, then they recommend focusing on your investments first. This is because investments compound and over 20-40 years can add up considerably, so getting in while you’re young has a bigger effect. Being young you are also able to better handle more volatile investments (such as shares) as you still have many decades before you need the money.
Will tying all your cash up in a mortgage create other problems?
If you’re considering taking a large sum of your money and paying off a mortgage then make sure you really consider your future liquidity and cash flow. If you use your savings to pay off the mortgage, you’ll no longer have access to those funds until you sell the property. This selling process can take at least 1-2 months and often far longer, so your liquidity (how quickly you can access your wealth) is lowered.
On the other hand Mortgage repayments are usually the biggest expense for most people, so paying off your mortgage and no longer having that expense frees up cash flow. If you’re approaching retirement, this can be fantastic as it means you won’t have to tap into your retirement assets as much to meet your monthly expenses.
If you’re younger though, this extra cash flow can be a double edged sword as it leads many to increase their spending through Lifestyle Inflation. This can cause even bigger problems than just poorly spent cash flow as when you do retire later on, your retirement assets might not be able to keep up with that new higher spending habit.
Be honest about your finances and spending habits, if you know you’re not great at controlling your spending then a good way to ensure this doesn’t happen is to immediately use that added cash flow to start investing for retirement after you finish paying off the loan. This way your general lifestyle spending remains the same and the money you were sending to your mortgage is now redirected towards investments.
Another cash flow related problem some face is losing access to their Redraw or Offset Account once they finish their mortgage. You might have $10,000 in there that can be used for emergencies, but once the loan is fully paid off it’s no longer available. As such, make sure you have a separate emergency fund of a few months saved up if you intend to fully discharge your mortgage.
Financial Security & Risk Profiles
What is your risk profile and how flexible do you want to be?
One of the main reasons many chose to pay off their mortgage is the added security they get from it. They feel less stressed, can sleep better at night and can just worry less in general about many things. The more risk adverse you are, the more this line of thought will appeal to you, but even very risky people can benefit significantly from paying off their mortgage.
For example, even if you’re a big risk taker and are certain you can make more money investing the extra cash, not having a mortgage will make your day-to-day finances easier and likely cause fewer fights over money. Financial trouble is the second most common reason for marital divorce, so having less financial pressure could legitimately save your marriage one day.
Even if you’re not married, when you have no mortgage you have less debt and less constraints on what you must do. This gives you better financial security, more flexibility to take risks like starting a new business and more capacity to withstand financial stresses like losing your job, a serious health issues or even a natural disaster.
While it’s not as flashy as buying a fancy car or expensive watch, having no debt, high cash flow and the resultant increased savings that this enables can make an enormous difference to you or someone you love. Maybe it means you can afford that expensive and urgent medical treatment for your father or maybe it means one of you can stay at home permanently and ensure your children get the best care.
Often these befits far outweigh “better investment returns”, so be sure to give them the proper consideration they deserve. Not everything in life is about money, so even if you can sleep sound at night with a mortgage over your head, don’t discount how beneficial having increased flexibility can be in times of distress.
Tax Deductions (USA)
For those in the United States you’re permitted to deduct the interest you pay on your home mortgage. So keep in mind that the more of your mortgage you pay off, the less interest you’ll have to claim as a deduction.
You can deduct up to the first $750,000 of a loan that’s secured by your home. This is reduced to $375,000 if you’re married and filing separately. If your home mortgage debt was incurred before December the 16th, 2017 then you can deduct home mortgage interest up to the first $1 million of a loan and up to $500,000 if you’re married and filing separately.
Pros And Cons Summary
- Saves you hundreds of thousands of dollars in interest
- Increases cash flow and reduces debt leading to less stress on retirement assets
- Increases financial security leading to more resilience against unforeseen problems in life
- Increases flexibility allowing you take on higher risk things such as starting a high risk business
- Reduces money issues leading to lower probability of divorce, less stress and better health
- Peace of mind allowing you to sleep better at night
- May mean you don’t get as high a return on your money versus other investments
- Reduces your liquidity as it can take many months to sell a property
- Means you’re no longer eligible for the federal interest tax deduction if you live in the United States
- May increase your Lifestyle Inflation if the extra cash flow isn’t redeployed properly
- Means you no longer have access to your Redraw or Offset Account funds
- May mean extra fees if your loan doesn’t support extra repayments
Paying off your mortgage early is a fantastic achievement that we definitely recommend, along with a lot of other secret Mortgage Advice. However you need to consider your current position along with your short and long term goals first. The correct thing to do is going to be very different for a couple approaching retirement versus a young woman wanting to start a new, high risk business venture.
If the answer after this proper consideration is yes, then we have the leading advice on How To Pay Off Your Mortgage Faster as well as a fantastic, free Excel Mortgage Calculator Spreadsheet all ready for you.
Should I Pay Off My Mortgage Or Put It In An Offset Account?
Offset Accounts are actually a pointless waste of money for most people. This is because most basic 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.
As such, we recommend making sure you have a loan with the lowest interest rate possible and simply pay off the mortgage. You will first need to make sure your loan has a Redraw facility, but as this is such a basic feature you’d be hard pressed finding one without it.
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).