I have had this discussion with a few people in the last week, should I pay off my mortgage early? There are a number of considerations that need to be made before you start reducing your mortgage.
Do you have other debt at a higher interest rate? If so, you should clear this debt before you even start thinking about reducing your mortgage. Some credit card companies charge over 20% APR, much more expensive than any mortgage rate out there.
Do you have an adequate emergency fund? If you don’t, you need to build this up before paying into your mortgage. How much you need differs from person to person e.g. a civil servant with a steady regular income will need less than an entrepreneur in a start up business.
Having an emergency fund at all has come under fire in recent times. With interest rates so low and DIRT at 41%, the net returns from deposit accounts are negligible. That is missing the point. The purpose of the fund is to provide you with an adequate cash reserve should you lose your job or get a large, unexpected bill.
You may invest your surplus cash instead and get a better return than the interest rate you are paying. Be mindful though that you are taking an increased level of risk by investing in order to beat your interest rate. You also have to take taxes into consideration. To beat a 3% interest rate, you need to return 5.08% or 4.48% if paying taxes on gains at 41% or 33% respectively.
If you are on a tracker mortgage, should you consider paying off your debt early at all? It is certainly easier to make more money by investing as you need a lower return to make a profit. Is having a good rate a good enough reason to continue paying interest for the full term?
Another thing, interest rates won’t stay this low forever. Why not reduce the capital amount now. When rates do go up, you will owe less and the higher interest rate will be on a lower amount, meaning lower repayments in the future.
What are your other goals, when do you want to achieve them and how much will they cost? If there are things that you want to do in the next few years, you need to make sure you have the funds available so you can do them. There’s no point in putting your life on hold while you pay off debt, there’s more to life than that.
There is no one size fits all answer as to whether you should pay off mortgage debt early. There are constant demands on your cash and it is important to find the balance between living now, saving for the future and paying off debt. One thing though, I have never meet a person who regretted being debt free.
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