Toss this question in amongst a well-rounded gathering of financial advisors, bankers, real estate experts, investors and home owners and you’re in for one hell of a debate.
It’s a straightforward question that on the surface should elicit a straightforward answer, yet for those considering whether to hop on the fast track to paying off their mortgages, there are a number of important considerations to take into account before doing so.
No one disputes that paying off a mortgage completely lifts a tremendous financial burden off ones shoulders and does wonders to increase cash flow. Finally owning your own home outright frees up a lot of breathing room – both of mind and money, which is what makes paying off a mortgage as fast as possible seem like such a sound strategy to most NZ home buyers. But is it always the best way to go?
–The Road To Risk-Free Return On Investment
Most financial advisors will tell you that adopting an accelerated pay-down approach to your mortgage is a risk-free and therefore safer approach to dealing with surplus cash flow because it is pretty much the same thing as investing your money in a savings plan where you can’t touch the savings.
Cutting the life-span of your mortgage debt will guarantee you savings in not only the number of repayments you have to make thereby emancipating you from debt sooner, but also in the interest you will inevitably be spared from having to pay.
Depending on how much you choose to increase your mortgage repayments by, the savings on interest repayments you stand to gain can be considerable.
–Don’t Stretch Yourself Too Thin
Of course, this strategy is only viable for those with the extra cash flow to warrant it. Those tied into a long term-mortgage should never consider making extra repayments if the result is going to cause them to become over-extended financially thereby leaving them unable to deal with any unforeseen crises that could emerge – such as a loss of job or a sudden an unexpected hike in interest rates.
Stretching your savings account over a barrel just so that you can pay off your home quicker is a risk that could end up costing you far more than you stand to gain should fate conspire against you. A good rule of thumb is to have between 3-12 months of necessary expenses saved away where it can be readily accessed in case of an emergency.
–First Debts First
Prioritizing which debts you allocate your money too is the hallmark of every smart and effective debt repayment plan. Side-line your credit card debt (where the interest rates are crippling) in favour of a speedier end to your days spent in servitude to the almighty mortgage, and you could soon find yourself swimming in a red sea of trouble with fiscal fins circling. If you’re considering paying off your mortgage quicker then make sure that your consumer debt is taken care of first.
–Turning The Tables On Inflation – Slow & Steady Wins The Repayment Race
A further benefit of sticking to your long term mortgage repayment plan is that it’s a strategy that turns the power of inflation against itself (at least in the case of a fixed rate mortgage).
As time marches on and the inflation causes the prices of virtually everything around you to go up, your mortgage repayment will remain exactly the same – essentially meaning that it will become progressively cheaper and therefore more affordable to make repayments on your home loan.
–Invest Is Best?
Investors will often balk at the notion of considering down paying a mortgage faster as a viable investment vehicle. This is because if there is money readily available, and you know where and how to invest it, you stand to gain more in terms of return on these slightly higher risk investments than by playing it safe and setting your sights on a return 30 years down the line at a highly contestable interest rate.
Those currently weighing up the respective pros and cons of accelerating their mortgage repayments need to keep in mind that there is no one answer to this particular question.
Personal circumstance is king, which is why it is advisable to take a careful and detailed appreciation of your current financial situation and then conduct some calculations using a mortgage repayment calculator to deduce just how much you stand to save should you decide to proceed down the road of paying off your mortgage faster.