For the past six to seven years, mortgage rates have averaged less than 5%. Many argued there’s no better time to pay off your mortgage than now, especially in an economy that is unpredictable.
It is an appealing proposition as you’re able to shave off significant amounts on your balance if you pay earlier than scheduled. That would after all, seem the goal of lenders: to encourage borrowers to reduce their monthly payments with lower balance payments.
For example, using your mortgage calculator, if you’re on a £150,000 repayment mortgage at a consistent rate of 3.5% spread over 40 years, but choose to pay a reduced payment period of, say 25 years, it will cost you £225,300, instead of £279,000. That means you’ll save a hefty £170 on monthly payment!
Really, no one wants to be indebted longer than necessary and watch it accumulate with interests over the years. But even if you have some free money lying around or got some financial windfall, paying off your mortgage early isn’t always a smart decision. Besides, it could leave you financially drained or left with limited liquidity.
So, if you’re considering offsetting your mortgage balances early, here are reasons why you should review the plan.
Pay off Your More Expensive Debts First
Mortgages are called ‘good debt’ for a reason. They are properly spaced out for convenience and ease of payment, very much unlike credit cards, store cards or unsecured loans with significantly higher interest rates that cost you an arm and a leg.
You should focus on offsetting your more expensive debts that costs you a lot to pay over a long time.
Invest Any Free Money into Your Pension Scheme
Rather than pay off your mortgage from any extra saving or free cash you’re fortunate to get, why not put it in a scheme that rewards you better and helps you save more in the long run? For example, the pension scheme is tax-efficient because the government contributes to your savings while also offering you tax relief.
If you don’t have a pension plan and have some money to spare, you should think of opening one or let your company set up one for you and then invest the money there. Your employer is also obligated to contribute to your pension. This way, your pension savings will double and you could guarantee a more secured future.
Check to See if There are Better Options on Savings Rates
Investing your money into a pension scheme is great idea. However, take your time to review your existing pension plan to see if it’s the smarter option or if it’s better to explore other savings options. That is if the savings offers you a better deal than what you’re paying on your mortgage. This is the time to do your math and make comparison, after factoring in tax deductions on savings.