Paying off your home loan sooner than necessary may seem like a great idea if you have the chance to do it. But it isn’t that straightforward; you need to put a lot of thought in to the financial advantages and disadvantages of paying off the loan.
If you have the money available to pay off your home loan early before you take any action you should take a look at some of the possible outcomes of doing so (read more at NPBS)
Early repayment penalties and what they can mean for you
Some home loans contain clauses which mean that you’ll have to pay a penalty if you pay them off early. This is particularly common with loans that offer initial benefits such as fixed rates; lenders want to make sure that they tie you into the loan for the rest of the lending period after the initial beneficial repayment time.
If you think that there is any potential of you paying off your home loan early you need to make sure that you check the conditions of the loan very carefully before you sign. It’s certainly possible to get a home loan where you won’t be subject to any early repayment penalties, and you don’t have to pay a fortune to get one.
How much is the early repayment penalty?
Penalties for repayment vary but can generally equate to about one of two months’ worth of interest payments. You will pay more if you repay the loan earlier in the repayment period than later as the amount of interest included in your monthly payments will be higher. This can end up costing you a lot of money.
What other problems could you encounter?
If you spend all the spare cash you have paying off your home loan then you may find your lifestyle choices limited. Yes, you will have real estate of some value but it may be difficult to release any of that value should you need to; this is especially the case as you get older. It may be better for you to keep savings back in reserve.
What alternatives are there to paying off your home loan?
If you take the opportunity to invest your money then not only will you have access to cash if you need it, you will also stand the chance of saving enough to pay off the whole loan in cash at some point. You need to look at your interest rates, those which lead to you paying interest on your mortgage, and those which lead to you gaining interest on investments. You can then decide what would be most beneficial to you.
Another option, if you have cash to spare, is to pay off high interest debt such as credit cards. This will save you more money in the long run and will be more beneficial financially. If, after you have paid these debts, you still have the financial resources, you can then make extra payments against your home loan.