People, and personal finance experts are divided about whether paying off your mortgage quickly is a financially sensible idea. Skeptics point to the variety of other financial demands, and the reality that most households don’t have an emergency fund in case of unemployment. Proponents suggest that, by paying off your mortgage, you’re saving a lot of money on interest and earning full ownership of an important asset.
So if you’re keen to own all of your own home, and eliminate your mortgage, here’s how to do it.
Know You Can
Turning towards mortgage repayment as a financial priority should only be done once certain other financial priorities are established. You would want to have an emergency fund, so in order not to have to redraw on all your good work should something happen, a solid contribution scheme to your superannuation, excellent insurance and an ability to continue some level of saving. If you’ve got all those things, paying of your mortgage is a viable financial option.
The advantage of paying your mortgage more frequently is two-fold. On one hand, you are constantly reducing your capital and therefore your interest. On the other hand, you sneak in a couple of extra payments per year than if you were paying monthly. The easiest way to achieve this is to align your mortgage repayments with your payslip, and deposit money in your mortgage on the day you get paid. Even fortnightly repayments has greater financial benefit than monthly.
Pay Above The Rate
Check out one of the mortgage calculators online to see the effect extra repayments can have on reducing your mortgage. That way, you can best tailor a repayment amount (above the current interest rate) that can be accommodated easily by your finances and take years off your mortgage. The figures are startling. An extra $100 a month repayment on a fairly standard $250,000 mortgage means you pay off your mortgage 3 years and 3 months early. Increase that contribution to $400 a month, and you shave off 9 years of repayments.
Invest Your Raise
If you’ve gotten a significant raise, why not divert the extra money you will be receiving straight into your mortgage account? You’ve proved you can achieve you financial goals on your current income. If you can invest a couple of raises into your mortgage repayment, you would be able to save some significant money on your interest.
Invest Bulk Amounts
Gotten an inheritance? Earned a Christmas bonus? You might have a thousand things to do with that money. If, however, your major financial goals have been achieved, why not look at investing it into your mortgage repayment. You’ll instantly decrease your principal and save on interest.
Round It Off
The great thing about deciding to pay off your mortgage is that it doesn’t require huge measures to achieve your goal. By changing to weekly or fortnightly repayments and contributing a little extra each month, you’ll be able to shave years off your mortgage. The other idea, mentioned in a Sydney Morning Herald article, is that you can round off a figure should it be an achievable amount. Say, after your repayment, your mortgage figure ends in $200. By rounding it off, you’re investing a bit of extra money without having to strain your overall finances.