For most of us the mortgage we take out when we purchase a home will be the biggest single debt we’ll ever have. It’s a huge financial commitment. The monthly repayments can feel like a dead weight around our necks. And the term of the loan seems to stretch out before us forever - 25 years is the typical term for a housing loan in Australia and that seems like (and is) a long time. So what’s the best way to deal with this situation? Pay off your mortgage - fast!
What do I mean by that? Tackle the problem head on and repay that mortgage more quickly. Instead of taking the full 25 years, aim for 15 or even 10 years. It’s not easy for most of us but you’d be surprised what you can do with a little planning and discipline. And the benefits of eliminating that mortgage are many. First up, you’ll save money. Have you ever worked out how much interest you would pay over the life of a 25 year loan? It’s staggering when you see it written down in front of you. I nearly fell out of my chair when the bank manager presented the figures at the time we applied for our first mortgage. For example, on a $100,000 loan over 25 years at an interest rate of 7.5% you would be paying over $120,000 in interest alone (that doesn’t include the principal) over the period of the loan. If you were able to pay off the debt just 7 years early, you would save nearly $40,000.
And you’ll get a better return on your investment. You would have to invest your money and earn a higher rate of return than 7.5% after tax (in the example above). If you put your excess funds towards paying off your mortgage you’ll earn the equivalent of a 7.5% return - risk free. How many other investments offer an after tax return of at least 7.5% with no risk? You’d be hard pressed to find any.
And as I alluded to above, interest payments on a loan used to buy an owner occupied property is not tax deductible. You should bear this in mind if you have other tax deductible debt you’re paying off. For example, if you’ve borrowed money to buy an investment property or maybe a share portfolio, the interest you’re paying on that loan is most likely tax deductible. You may be better off paying down your own mortgage first.
Now as I said at the outset, paying off your mortgage early is not an easy task for most people. However the financial gains you could receive make it well worthwhile.
