Buying property has become part of the social norm, and along with it has come the norm of having a mortgage. A debt hanging over your head for the next 25 to 30 years of your life, an obligation to keep working in order to repay what you have borrowed. It can be all too easy to simply pay the minimum repayment each month and hope it will go away, but nothing will beat your mortgage blues quicker than some extra repayments.
Here are four reasons why extra mortgage repayments are a logical use of your hard earned cash:
You’ll save money
The most obvious reason to make extra mortgage repayments is the cost saving. Here in Australia, the average home costs around $400,000. Assuming you put down 20% plus all purchasing costs, over $300,000 of interest will accrue over the life of an average 25 year loan. 42 percent off all of the money you pay to the bank will go in their pocket as opposed to paying off your home. Paying even $10 a week extra off of the loan will save you over $13,000 and result in you owning your home outright a whole year earlier.
The debt isn’t going anywhere
Unlike investing your money in the stock market, every extra dollar invested into extra mortgage repayments is guaranteed to reduce the amount of your loan. The value of your home might fluctuate over time, but your loan amount won’t vary accordingly – the only way to reduce your debt is to repay it. Even if your property halves in value the bank won’t agree to halve your loan amount just because they are nice people. Why would you risk investing in something which could go down in value when you’ve got a safe investment in your own home?
You aren’t taxed on extra repayments
By making extra mortgage repayments you aren’t earning income, you’re reducing your expenses. The beauty of this is that you are taxed on what you earn, not what your expenses are. Even if you cold earn 8% in a risk free investment, after paying tax on your earnings it might work out to be less than what you could have saved investing that money into your mortgage at 6%. If you decide to sell your family home in the future and it has gone up in value, many countries will offer capital gains tax exemptions or reductions – try saying that about other forms of investment!
The tax deduction is illogical
While not available for homes in my part of the world, American friends are quick to point out that they shouldn’t pay off their mortgage early because the interest is tax deductible. The glaring hole in this logic is that in order to claim the deduction, you need to pay the interest – and the interest will always outweigh the return from the deduction. You’re paying the bank a dollar for the privilege of not paying the government 40 cents. Yes, paying off non-deductible debt such as a car loan first may be a better option (assuming the same interest rates) but at the end of the day debt is debt – regardless of deductions.
So next time you receive a windfall such as a tax return or you have a few extra dollars burning a hole in your pocket, contribute them to your mortgage as extra repayments and enjoy the knowledge that you’ve made the smart decision.