There isn’t a right or wrong answer in this instance, but we discuss a couple of scenarios in this article – ones that may apply to you.
Scenario 1: You have a mortgage and other loans
If you currently have a mortgage, you will generally be paying a lower interest rate than any other loans or credit lines you may have.
Usually smaller loans such car loans, personal loans and credit cards carry higher interest rates, so if you currently have a revolving line of loans, you may want to consider paying these off first before making higher payments onto your home loan.
A great way to reduce the impact of paying high interest rates on your current loans is to contact your financial institution and consider any options to consolidate the smaller loans onto your mortgage loan. This will be a favourable move for your credit score and your pocket as it will reduce your total number of open accounts, reduce your credit card usage and enable easy payment management with only the one payment to schedule month to month.
Scenario 2: You have a mortgage but no other loans
If you are on the other side of the conversation and actually do not have any other loans or credit cards balances to manage, paying off your mortgage early means you will benefit from paying less interest in the long run. For example, if your original loan had been calculated on an interest rate based over 30 years and you pay it off after 15 years, you are looking at some major savings!
Another benefit is that once you have paid your mortgage off, you will no longer have to make those scheduled payments, meaning you have increased potential for savings and retirement. Not only are you financially free of repayments, you will own your home outright which means you have equity if you need it.
But wait… here are some other things to consider:
If you have a mortgage and are currently renting out the property, you can save on tax as interest paid on your bond as tax deductible.
Depending on the type of loan and its terms and conditions, you may be liable for any exit fees or penalties when closing your home loan account.
By closing your mortgage, you will no longer have immediate access to low interest credit, which may be useful for emergencies or cash flow management.
Before you make a decision on this matter, seek professional advice from an expert or financial advisor. Omega Tax & Accounting is here to help and can assist with evaluating the best solution for you and your financial situation. Call us today on (08) 9562 0526.