Should I pay off my home loan early?
Covered in this blog...
What is the real cost of a mortgage?
The lifetime of a mortgage in New Zealand is usually between 25 to 30 years. Because the mortgage lasts so long you end up paying about the same amount back in interest as you have borrowed in principal. If you look at the infographic in the next section, you will see that when you borrow $300,000 over 30 years @ 5.45% you end up paying back $609,533 in total.
Wow, $309,533 just in interest payments, that’s more than what was borrowed in the beginning! That’s the real cost of a mortgage, because it lasts so long you end up paying the loan off twice, once for principal and once for the interest.
What effect does making extra payments have?
I got a raise and now have $50 cash left each week, so that’s $100 per fortnight extra I can put on my mortgage. Comparing the two scenarios below shows how you can really gain value out of directing extra funds into your mortgage. Cutting a whopping 5 years and 10 months off the mortgage lifetime and a saving of $65,365 in interest. The key is that you pay interest for a shorter period of time and that translates into a significantly smaller debt.
What else should I consider?
There’s no question that the figures above show a fantastic benefit from putting extra funds into your mortgage but that doesn’t necessarily mean if you are in this position you should do it, there are other things to consider.
The extra funds may serve you better if you put them towards building a diversified investment portfolio, this will protect you from industry specific shocks. Investment opportunities like Kiwisaver can be a prudent use of money above your mortgage and livings costs.
There are a lot of factors to consider and the decision will depend your lifestyle and goals in the short to long term future. If you find yourself in this position and you are unsure what the best path is you should seek the advice of a qualified financial adviser.
Extra Mortgage Payments Summary
Extra mortgage payments = less overall debt, faster payoff, shorter time to being mortgage free which is great.
You may miss out on other investment opportunities if you focus solely on your mortgage.
Extra money paid into a mortgage most often cannot be withdrawn if you need it again without a mortgage restructure.