How To Pay Off Your Mortgage
There are a few different money hacks you can use to pay down your mortgage. It all depends on your financial situation and how much you can afford to pay every month.
Use a debt payoff planner to see how much you can save by paying off your mortgage early. Then, pay a little extra on your mortgage payment each month. Its a great way to reduce the high-interest debt youll pay and help you pay off your mortgage faster!
Consider a lump-sum mortgage payoff if your mortgage debt is small enough. Its a one-time mortgage payment that pays off the entire debt, freeing up cash for other things on your to-do list.
Is It Better To Pay Off Your Mortgage Or Invest At Retirement
When preparing to retire, one question that is on most peoples minds is, Is it better to pay off my mortgage or invest at retirement? A common financial goal for many people is to retire debt-free, but most people approaching retirement are still paying off their mortgage.
Before you do anything, its important to evaluate your financial situation, available options, and opportunity costs.
Paying off a mortgage early can provide invaluable peace of mind and improve your cash flow. However, you might get a better return on your money by investing in the stock market, your business, or real estate while enjoying tax benefits from your mortgage.
So whats best? Lets examine the costs and benefits of paying off your mortgage versus investing at retirement.
Define Your Goals And Pick The Right Path For You
Theres no right or wrong answer when youre choosing between investing and paying off your mortgage. For some people, it makes more sense to invest. For others, the better option is having peace of mind and the risk-free savings you get by paying off a mortgage early. If you cant decide between the two, you may find doing both affords the perfect balance of growth potential and guaranteed savings.
A financial professional can help you balance your needs and goals and help you decide whether investing, paying off your mortgage or a combination of the two is best for you.
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So Is It Better To Pay Off Your Mortgage Or Invest
What is right for you will depend on your own financial circumstances, as well as your goals and priorities.
For many people, it will arguably be an emotional decision as much as a financial one.
It might be that you dream of being mortgage-free. Or you may be perfectly comfortable paying down your home loan but also the relish the idea of growing your money by investing in stocks.
So long as your wider finances are healthy then both can be sensible options.
Other Considerations For Your Situation
You have other higher interest rate debt
If you’re carrying other high interest debt like credit cards, focus on these first. If you have an APR above 17 percent, paying down your credit card is a better return than both the S& P and your mortgage.
You are risk averse
You shouldnt be investing in the stock market if you won’t be able to stomach a sharp decline or your time horizon is so short that you wont be able to recover. There are investment questionnaires online you can take or consult with a financial advisor to help you find a portfolio that will let you sleep at night.
You need cash or have a very short timeline
If you need cash or need to have a cash reserve for emergencies, neither the stock market nor your home equity is the place to do that. Selling your stocks in the event of an emergency may mean selling at a loss. Getting at the home equity that youve built by paying down your mortgage requires taking a home equity loan or, worse, selling your house neither of these is ideal for accessing cash in a hurry.
You are eligible to refinance
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Should I Overpay And Clear My Mortgage Early
For anyone who owns a home, mortgage repayments tend to be the biggest monthly expense.
So its no wonder that many ask if it would be smart to use spare cash or a financial windfall to reduce that outlay.
While using savings to pay off the mortgage early can ease quite a big financial burden, this is not a decision to be taken lightly.
There are pros and cons to consider which we outline below.
Pay Off My Mortgage Or Invest
Look at your own personal situation and honestly answer the previous questions. Next, evaluate your responses and decide if you are better off paying off your mortgage. Paying off your mortgage or investing in the stock market is a personal decision. Only you can make the decision. Analyze your own comfort with debt and determine how youll feel living in a paid off home. Then, make an educated decision.
Although weve covered investing the money in the stock market, you also might want to check out real estate crowdfunding sites for alternative investment ideas.
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Where Does Investing For Retirement Fit In
Handling your retirement account and your mortgage really is a balancing act. Which to prioritize is a personal one. Consider:
- What is your mortgage rate and how much of your monthly income is dedicated to paying your mortgage?
- What are your plans for retirement income?
- How many years from now do you expect to retire?
- What is your current cash reserve?
Ultimately, your financial situation determines the investment mix here. Paying down your mortgage is the safer option, but investing might move you further along in your goal of saving money for retirement.
Pay Off Mortgage Or Invest: Special Considerations
Some folks may be somewhere in the middle. Though investing your extra money is usually the better solution, you may already have enough saved for retirement. If that is the case, putting your extra money towards your mortgage may make sense.
For instance, if youre comfortable with your retirement savings, you may be able to pay your mortgage off completely before retirement. By doing this, you can eliminate one of your biggest monthly expenses. Therefore, your retirement income will go further.
If youre not sure where youre at on retirement savings, contacting your financial planner might be a good idea. An advisor can put together a retirement plan for you.
Mortgage rates have been very low over the last several years. If you didnt refinance and youre stuck with a high mortgage interest rate, paying off your mortgage may also make sense.
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Current Mortgage Rate Levels
Now, lets pause and go back to the current level of mortgage rates. As I mentioned, in Canada, you can currently get 7-year or 10-year fixed closed rate mortgages below 3%. I cannot stress enough how low that is. You might be too young to realize how high the rates once were, but people in their 50s or 60s surely remember the 15% interest rates in the early 80s. Therefore, if you can renegotiate and lock-in your rate at 3% or lower, you should do so right now. I cannot predict the future, and it is possible that rates continue to fall, but, there is a much greater chance that the rates will rise.
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Pay Off Your Mortgage Or Invest In Shares
One of the biggest debates in all of finance is whether you should pay off your mortgage or invest in shares!
Both options have their pros and cons.
With record low interest rates, the numbers and trade-offs are a bit different than before. But its not all about number crunching, there are other aspects to consider too..
On top of the mortgage vs investing debate, well consider renting vs owning, and 6 mortgage strategies for optimising your cashflow.
Lots to cover, so lets get started!
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Pay Off Your Mortgage Or Invest Heres A Checklist
| Factor | Pay down mortgage / add to offset account | Invest extra savings |
| Returns | It makes more sense to consider investing when mortgage interest rates are lower. Currently owner-occupied mortgage rates are around 3% p.a. | You need to compare the expected return from investments to the mortgage interest rate. Over the long run a diversified Stockspot portfolio has earned 7-10% p.a. |
| Tax | Is your interest tax deductible? This is based on whether its your primary residence or an investment property. | The after tax return from investments will vary based on the level of franking credits and concessional capital gains as well as your tax position. |
| Time horizon | Its a safer option to pay down the mortgage if the period remaining on it is less than 3 years. | The longer you have to pay your mortgage, the more attractive investing becomes. You have a better chance of earning more than the mortgage interest rate from your investments. |
| Safety buffer | You need to build a significant safety buffer and be ahead on mortgage repayments before considering investing. | Make sure your investments can be easily sold should your circumstances suddenly require you to pay down more of the mortgage. |
| Income certainty | If your income is less certain it makes more sense to pay down your mortgage. | If your work income is stable, investing is more attractive. Theres less risk youll need to sell down your portfolio early to meet mortgage repayments. |
Do You Have Emergency Savings
It is important to have money on hand in the event of a financial emergency. That could be anything such as a broken boiler, car repairs or even having to cover bills after losing your job.
Your future self may appreciate being mortgage free as early as possible, but your present self may need the cash or a lump sum for emergencies.
For this reason, we recommend that you keep between three and six months worth of your salary in an easy-access savings account.
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Will I Have To Pass The Mortgage Stress Test When I Renew
The short answer is no, but only if you renew with your current provider. If you want to switch to a different bank or other federally regulated lender, youll be treated as a new borrower and will have to qualify at the higher stress-tested rate. That means the lender will review your income and debts to make sure you could afford your mortgage payments at a rate of either 5.25 per cent, or your contract mortgage rate plus two percentage points, whichever is higher.
In other words, if a federally regulated lender is prepared to offer you a five-year fixed rate of 5 per cent, youll have to qualify at 7 per cent. There is one exception, according to Mr. McLister: if you have a mortgage insured by Canada Mortgage and Housing Corp. that you got before the stress test was introduced on Oct. 17, 2016, some lenders can grandfather you and let you qualify at their actual five-year fixed rate.
Before Paying Off Your Mortgage Answer These Questions
1. Will you feel better if you get rid of your mortgage more so than receiving investment gains?
If the answer is yes, then you can stop right here and start paying off your mortgage.
2. Do you expect future stock market returns to surpass your mortgage interest rate?
Since historical stock returns are in the 9% range, it might seem like a clear mathematical choice to keep a low rate mortgage and put the extra cash into the stock market. The readers 2.9% mortgage rate is low. On average, its likely that his stock market investments will surpass 2.9%, over the long term.
Yet, the stock market is volatile and future returns are uncertain. If you can live with the volatile stock market returns and if your mortgage rate is 4% or lower, then its likely that over the long term your stock market returns will exceed 4%. This scenario favors not to pay off your mortgage early and investing in the stock market instead.
But consider the state of the market before jumping to the conclusion that applying your extra capital to stock market investments is always preferable to paying a higher monthly mortgage payment. Interest rates can often predict whether you will make a significant gain via stock investment. For example, once interest rates exceed 6%, the stock market tends to result in losses, not gains. And the probability of a loss of your invested capital rises significantly once interest rates surpass 3%:
3. Do you know what stock market returns will be in the future?
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Advantages To Paying Off Your Mortgage Early
The biggest advantage of using savings to pay off all or part of your mortgage is the reduction it will bring in your monthly outgoings, leaving you with more spare cash.
Take the example of a £200,000 loan with a 3.5% interest rate:
- Over 25 years, the total amount of interest payable would be £100,374
- But over a 15-year term, the borrower would only pay £57,358 in interest
By paying off your loan it means you also wont have to worry about rising interest rates.
The other upside is that you own more equity in your home which means you can benefit from lower interest rates when you remortgage.
Overpaying means you can shorten the length of your mortgage term so that you can clear your home loan as soon as possible.
One More Consideration: Taxes
When you file your taxes, you can deduct the interest you paid on your mortgage. To do that, you need to itemize and claim the mortgage interest deduction. Previously, there was little incentive to make extra payments early in the life of a mortgage. Your payments are mostly interest in that period and the deduction lessened the sting of that interest. But the new tax law changed the calculus because fewer people could itemize after 2017. The result is that a new mortgage is more costly for some people. So if youre paying a new mortgage and you arent itemizing, you may want to make extra payments to decrease your interest more quickly. As mentioned above, inflation will make payments easier later in your mortgage. So after a few years, consider diverting extra money to investing instead of extra payments.
Also keep in mind that tax laws now limit SALT deductions to $10,000, which they didnt before. The lower limit could leave you paying more in property taxes for a home. This wont directly affect your mortgage payments but it increases the overall cost of owning a home. If you were already on the edge of affordability, refinancing or even moving may make sense. Residents in the high-tax states of California, New Jersey, New York, Illinois, Texas and Pennsylvania will feel the new limit the most. Make sure you factor in SALT if youre still in the planning phase of buying a home.
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What Are The Benefits Of Paying Off Your Mortgage Early
There are several reasons why paying off your mortgage early could be a good idea.
- Gain full equity and dont pay interest: The main benefit of paying off your mortgage early is that you build equity in your home while no longer paying interest.
- Predictable savings on interest: Since most mortgages tend to be fixed rate with a predictable monthly payment, you can see exactly what youre saving in interest when you pay your mortgage off.
- Lowering your debt: Assuming your income doesnt go down, paying off any debt will lower your debt-to-income ratio. This can be good for your credit score and can help you qualify for better terms on future loans.
- Peace of mind: Paying off a significant debt can give you a feeling of accomplishment and offer peace of mind because you no longer owe your mortgage lender.
What To Consider When Youre Paying Down A Mortgage
If youre lucky and current low interest rates mean your mortgage repayments are no longer as much of a financial burden, then you might have extra money.
Rather than paying off the mortgage as quickly as possible, you might want to diversify your wealth across different investments.
Paying down your mortgage and investing will both result in increasing your savings, but the main difference is that paying down your mortgage will reduce your debt whereas investing will diversify your overall wealth and income.
There are other factors to think about such as your lifestyle, your risk capacity and of course your marginal tax rate. The appeal of owning your home outright as soon as possible may be more important to you than earning a better return by investing so its really a personal decision. This video covers some of the key considerations.
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Advantages To Investing Your Money
If you investthen, over time, it is likely that your money will grow much faster than it would if you left it in a savings account paying a low interest rate.
To really harness the power of the stock market and enjoy the benefit of compounded returns, you need to leave your money invested for a minimum of five years .
Another advantage to investing is that you dont have to lose access to that cash if you need it in an emergency. This is because you can sell your investment if you need to.
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What about investing through my pension?
Paying more into your pension is also a form of investing. In this case, you will get the added bonus of tax relief on your contributions.
If you are in a workplace scheme you get employer contributions on top, so you will benefit even further.
Although this could be an excellent way to boost your retirement pot, the downside is that you wont be able to gain access to the money until you turn 55 .
For more information read our guide on pensions.
