Recently, I wrote about a commonly used false argument to pay your mortgage off early.
Another of the most sighted reasons for paying off your mortgage early is the feeling that it will bring knowing that you no longer have a mortgage to pay. For many people, it will reduce your annual expenses by 30% or more. That is a lot lower cost of living and let me tell you, it does feel great having:
1/. A paid off house
2/. Lower annual expenses
What is the problem with paying off the mortgage early?
There is an important point of this discussion that is often ignored. The thinking goes along the lines of this:
“If I pay x dollars a month extra on the mortgage I will be mortgage free in 15 years, instead of 30 years”.
If things go to plan and you are mortgage free in 15 years then everything is great. But what if something happens before the 15 years is up?
Maybe you lose a job and can’t get a new one
Maybe you have to take a severe pay cut
Maybe you get sick and are unable to earn income
Maybe any of the above happens to your partner
Maybe you go through a messy divorce
I think you get the idea. Life happens sometimes. But what does this mean for your mortgage?
Despite the fact you may have spent 10 years or so paying all that extra on the mortgage, your monthly repayments will remain the same whether you have $50,000 left or $500,000 left.
Many people make the mistake of thinking your monthly repayments are lowered as the mortgage goes on. It is only the interest portion that reduces though. The principal repayments increase.
So here you are 4 years away from having a paid off mortgage, but finding yourself in a bit of a situation. Because all your extra dollars have been going towards repayment of the mortgage, you have no money in liquid savings or investments to tap into.
You still have all of life’s other expenses to worry about. And your mortgage repayments are still the same as they have always been.
Unless you want to sell your house, then how will you pay for everything? You need cash.
Final thoughts
Don’t get me wrong. Having a paid off mortgage is a fantastic thing and is very liberating. But just take a bit of caution before deciding to throw all your extra cash on the mortgage.
We still have a lot of expenses outside of the mortgage and life can still happen before the mortgage is paid off, no matter how much we have put down already. During such life events, cash is critical. Yes, you could release the equity in your house by re mortgaging or selling, but that is expensive and defeats the purpose of paying the mortgage off quickly in the first place.
If you are hell bent on paying off the mortgage, then maybe consider at least putting a little bit of your surplus towards savings/investments. It is just one way of diversifying and hedging your risks.
If you need a personalised plan that makes the most of your housing asset whilst ensuring your individual goals are considered, then get in touch and we may be able to help.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here