7 reasons why it may be better not to pay off your mortgage early

Sometimes paying off your mortgage quickly may not make the best financial sense. Here’s a look at seven reasons why you may consider delaying paying off your loan.

Paying off your mortgage as quickly as possible can make a lot of sense – you can potentially save thousands of dollars in interest, you will own your home outright sooner and you can use the money that was going towards your repayments for other things.

But believe it or not – and I know this is probably not something you’d expect coming from me – in some cases, delaying paying off your home loan can potentially be a smart move. This might mean not putting more than your minimum repayments into your loan or, if you’re ahead in your repayments and are really close to paying off your mortgage, not clearing the debt entirely.

Here are seven reasons why you may be better off not paying off your home loan early.

1. You have bad debt

There’s good debt  – which is used to finance something that is expected to increase in value in the future or generate income – and there’s bad debt – which is used to buy things that might lose value quickly and don’t generate an income.

Credit cards and personal loans generally fall into the bad debt category and this type of debt is likely to be more expensive than your home loan. So, if you have anything that falls into that category it can be a good idea to focus on ditching that debt before you start making extra repayments on your home loan. The same goes for any outstanding bills.

2. You can get a better return elsewhere

Paying extra cash into your mortgage can be a great, low-risk savings strategy but it won’t necessarily give you the best return on your money – particularly when rates are low as they are now.

Essentially, by paying off your mortgage, your return is equal to the rate on your loan – and it is tax-free. So, let’s say you are paying 3.5%pa interest on your home loan then that is your ‘guaranteed rate of return’.

Chances are you can get a better long-term return than that. Over the past 10 years, for example, Aussie shares (ASX 200) have dished up total returns – growth plus dividends – averaging 9.26% annually. Of course, past performance is no guarantee of future returns and tax would apply on your earnings but it is an option to consider.

“With interest rates currently so low, those with a higher risk tolerance may seek a better return on their money by investing it. These investments could be drawn down in the future to accelerate your loan repayment,” said Apt Wealth Partners Director and Senior Financial Adviser, Andrew Dunbar.

It’s a good idea to have some buffer in your mortgage if you are thinking about taking this approach. Also, remember that shares and ETFs are long-term investments so don’t plan on accessing that money for at least five years. It can be a good idea to seek financial advice.

3. You plan to turn your home into an investment property

If you think that you might want to eventually turn your home into an investment property down the track then you may want to consider taking out an interest-only loan rather than paying principal and interest. That’s because you may be able to claim a tax deduction for the interest paid in the future. It’s probably best to get advice from an accountant or tax agent. You can build up your savings in an offset account or use any extra money towards other investments.