Understanding your financial goals — and where paying off a home loan sits among them — will make for easier finance decisions down the track. When you’re nearing the end of your home loan repayment term, it’s tempting to speed things up and wrap up your repayments a few months early. Who doesn’t want to see that loan balance zero out?
But before you dip into your savings or use a sudden influx of cash to pay off your outstanding home loan balance, it’s important to check all your other financial bases are covered first! Understanding your financial goals, plans and milestones — and where paying off that home loan sits in the plan — will make managing your home loan much more feasible for the average home loan borrower.
In this article, here are three do’s and one don’t to keep in mind if you’re tempted to pay off your home loan early:
1. Do prioritise your fixed expenses each month
Your average fixed monthly expenses — items like rent/mortgage payments, utilities and groceries — are non-negotiables that form the baseline for the expenses you need to get by. But it’s also good practice to consider debts like credit cards and home loans as essential payments that you shouldn’t skip. Whoever you owe money to, those are just fixed payments – that’s just part of your living expenses that you need to pay.
Car loans and Australian mortgage loans can often be secured by your property, and you shouldn’t potentially risk losing your car or home in the service of making an extra payment toward any unsecured loans. Potentially skipping any debt repayment (even here and there) can turn into a negative habit; even if the lender is allowing you to skip a payment and it’s not going to hurt your credit score, it’s an easy pattern to slip into and before long, will significantly affect your overall loan balance and financial planning.
2. Do have a savings buffer set aside
Prioritising having a savings safety net before extra personal loan payments can keep you financially secure, especially if any surprise expenses crop up. Your emergency savings are there to protect against worst-case scenarios, such as losing a job, a medical emergency, unexpected car trouble or urgent home repairs.
One easy rule of thumb to follow for building out emergency savings is to keep at least three to six months’ worth of bare-bones expenses on hand. Occasionally, if you need to take a small amount out of your cash savings to send a final home loan repayment early might work out fine – but you should always be mindful to avoid taking so much or so often that you’re left vulnerable in an emergency.
3. Do find out if your home loan comes with any additional repayment fees
Few lenders still charge a fee for paying off your loan early, sometimes referred to as a prepayment fee. These fees ensure the lender continues to make money off your home loan interest, even if you save on outstanding interest by making additional home loan repayments early.
If your loan does come with a prepayment fee, it’s a good idea to work out whether the interest you’ll pay in the remaining months is higher than the fee. For example, if you have only a few loan repayments left and are looking at a fee amounting to thousands of dollars, you might be better off waiting it out and making your usual monthly payments on time.
4. Don’t overthink it!
Having your monthly budget and cash safety net in place is a must, but it’s always better to aim for good rather than perfect!
Even if the money could go toward lowering your monthly payments on something like a credit card, that doesn’t mean it’s a bad choice to put it toward your home loan if that’s what you really want. There are good decisions and then there’s the best decision – sometimes it’s worth taking the time to weigh the mental benefits of getting one debt completely gone, versus optimising which interest rate to pay down.
An ideal financial plan looks different for everybody, so if need be it’s good to know that you can reach out to a financial counselling service, advisor, debt counsellor or get legal assistance to prioritise and pay down your debts.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.