Should I pay off my mortgage early?
I have often asked myself this… I think about how much money comes out of my account per-month and the thought makes me sick. This along with my student-loan are slowing down my financial growth. I long to be out of debt and stop paying interest on these different loans – this is how we become financially free!
Although a mortgage isn’t as bad as credit card debt, all of that extra money could be put to better use, it could be filling up my savings-account and helping me reach my financial goals!
It turns out the question ‘should I pay off my mortgage early?’ has plagued many people over the years. Their reasons not being too different from my own. It’s important to understand though, that there are both pros and cons to paying off your mortgage early.
I believe there are 3 main reasons to pay off your mortgage early, which will be explored in this post – but I’d love to hear from you in the comments to see if you have any others.
The benefit of a mortgages
Buying a house is a wonderful thing and an even better feeling. For most of us, where would we be without our homeowner’s mortgage? I know I wouldn’t have stood a chance of purchasing without it.
Being able to ask ‘should I pay off my mortgage early?’ means that we are currently in a privileged position. One that many people are still struggling to reach. This could be because of debt, circumstances, a lack of financial education, as well as a host of other reasons. Let’s thank our good graces and not squander our opportunities.
1) Save on the interest you pay
A homeowner’s mortgage is a brilliant thing that allows the average person to purchase a home, a home that is currently out of their price range. We need to remember that this isn’t free money – in fact, there’s no such thing.
The bank isn’t lending you money out of the goodness of their heart. You are paying them monthly for the privilege of borrowing their money. This is where the interest payments come in.
Please remember, that a mortgage is not without risk. If you start to struggle with your repayment, the bank can seize your home – making this thing you’ve been paying off monthly, rather pointless.
Let’s look at a quick mortgage example to help illustrate the point.
Borrowing $200,000 to pay for your home at an interest rate at 2.5% will mean you are paying back $5,000 a year, that’s around $417 a month for the privilege of borrowing money.
Please note that that does not include the principal payment. Let’s not even go into the 25-year cost but you could end up paying hundreds of thousands in interest over the mortgage term. Paying off your mortgage early could save you a great deal in the long run and make your paycheck go a lot further!
Should I pay off my mortgage early? – Hell yeah you should! Or at least really consider it.
Please also be aware that it’s important to save 3-6 months worth of expenses, this way if you fall on hard times you’ll always have a backup. This should be done before you consider increasing any mortgage payments.
Failing to plan is planning to fail, please make sure you’re making sensible choices that do not spread you too thin.
2) More money in your account to invest
You’ll no doubt see that after paying off your mortgage, you’ll have a lot more money left in your account at the end of each month. It’s a lot easier to start building for the future when you don’t have the weight of a mortgage dragging you down!
Saving is always a good thing, so once you’ve got your 3-6 month emergency fund (amended to remove mortgage repayments) you’ll need to figure out what to do with that extra cash. One of the biggest problems we have with savings accounts right now is that the interest rates are abysmal. I just looked at my bank – they’re offering me a cash ISA with 0.35% interest… and I have to leave my money in there for 2 years – not going to happen.
This year the government forecast a 2% inflation target. If I put my hard-earned cash into savings, it will be worth less in 2 years!
It’s time to put your money to work. How can we make our metaphorical gold make little gold babies?
It’s time to invest! We can start by putting a portion of our income into a stocks and shares ISA. This way we’ll be receiving way more than 0.35% interest. The S&P500 has an average annual return of 10%. Let’s say it only returns 5% – your return is more than with my bank…
So where should you invest?
The stock market
For more information on this, why not check out the The Simple Path To Wealth by J L Collins? The author goes over the best way to invest in index funds – which is a great way to diversify your portfolio, as you own a large portion of the whole market.
Another great method of investing is looking for an investment property. This is a good way to make some passive income, however, the initial entry is quite high. You’ll need to be able to front a 25% deposit for an investment property as well as additional costs.
If you’re interested in getting started, this book is a great place to begin.
If you live in a major city, this may well be quite expensive – in my area, a 25% deposit looks like £112,500. That is big money! The kind of money that takes a long time to build.
If you have a decent job and are able to save 500 a month, and were paying 500 a month on your mortgage, you’d be able to save 12k a year. Now that’s just over 9 years left to save! Oh boy – however, if you are in a relationship and your spouse is able to save the same amount, then you can accomplish the same thing in under 5 years.
The alternatives are turning your current house into a cash cow. This will help you bring in a lot more money initially to then invest more later! This is tried and tested and much cheaper than buying a new house.
Alternatively – why not buy a house further out? It will cost a lot less and you can hire someone to manage the property for you and still collect money every month.
You don’t always have to invest your money in a single property – you could always invest in a ‘real estate investment trust’. This would allow you to invest a portion of your money in a company that builds large blocks of flats, offices, etc. They would then pay you a dividend.
They are legally bound to payout at least 90% of their profits as a dividend to their shareholders at the end of the year! It seems like you’ll get a decent return.
Look at you, you’re now a property investor – sit back and let someone else deal with the tenant who won’t pay their rent.
This all came about because you had the sense to ask ‘should I pay off my mortgage early?’
I don’t know why I added this one to be honest. You could always loan money to people who need it and tell them what return you expect annually and how many years they’ll have to pay it back.
This is a really easy way to make money – however, this risk is higher than betting on the races in my opinion. I also don’t have the heart to go round hurting people who don’t have the money to pay – but that’s up to you. Be kind though, please!
Remember – going to jail will hurt your ability to build wealth I’m only joking – don’t loan shark, but lending may well be viable depending on your tolerance to risk.
3) Don't leave your debt to your family
Should I pay off my mortgage early? As I mentioned earlier, I’ve been thinking about this question a lot, especially since my circumstances changed. Now that I have a child, I’m always thinking about the future! It’s on my mind day and night. In fact, most of what I do now is for that future.
I want the best future for my child – in that future, I don’t see me leaving her my house with money still left to pay. It’s our job as parents to pay off our debts and not leave them to our children.
Sure, the likelihood is that by the time you reach your ripe old age, you’ll have already paid it off. But what if something happens sooner? What inheritance are you leaving? Surely not your troubles? Surely not your debt?
Once the house is paid off – all of that additional money can be used to buy more assets with your children as business partners; that way you’ll bring in larger amounts of money. Money can be used to pay for their education and experiences you’ll have as a family, amongst other things.
Then when you pass, your family will inherit a house as well as all your other assets. That way when the taxman takes his share, your family will still be left with a decent amount and a business to run – if they so choose.
Would you pay off your mortgage early? I know what I’m going to do.
Should I pay off my mortgage early?
As you can see, these 3 important reasons are quite compelling. If you decided to pay off your mortgage early you could save a substantial amount of money.
You could have a lot of money left over at the end of the month to invest in different areas to grow your money even more! With the added bonus of not leaving your family debt, rather a bunch of assets that could change the course of your family’s finances forever.
Please be aware that paying your mortgage off in full could lead to unsuspecting fines if you don’t know the rules. Make sure you speak to your mortgage lender to see how much extra you can pay each year to avoid this.
In reality, there is no right or wrong answer – in fact, this has been a one-sided view. There are many reasons to pay off your mortgage early, but you may well come up with a score of reasons against it.
At the end of the day, it is about what’s important to you and your current stage of life, as well as your means and circumstances. Definitely do not overextend yourself! If you have other debt – that should be removed first. For help with that check out this awesome article about removing debt.
Stay safe and hustle harder!