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

EFFIE ZAHOS
Editor-at-Large · 12 July 2021
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.


Compare Home Loans with Canstar

Lowest interest rates for 1-year fixed home loans

The comparison table below displays some of the 1 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by comparison rate (lowest to highest), then by provider name (alphabetically). Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 3-year fixed home loans

The comparison table below displays some of the 3 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by comparison rate (lowest to highest), then by provider name (alphabetically).Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 5-year fixed home loans

The comparison tables below displays some of the 5 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by comparison rate (lowest to highest), then by provider name (alphabetically).Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.


 

4. You are close to retirement

I’m a big advocate of entering retirement with little or no debt but, if you are nearing retirement, it can actually make financial sense to use any extra cash you have to salary sacrifice into super rather than adding it to your mortgage. Of course, be sure to stick to the contribution caps.

“Depending on your taxable income, making concessional contributions to your superannuation can save a lot of tax and boost your super balance, helping you achieve a better overall wealth position than simply paying off the loan,” Mr Dunbar told Canstar. “If your individual income is under $250,000 a year, you can save tax with this strategy because contributions into your super fund from pre-tax dollars attract a 15% tax rate.”

He offered this example: If your marginal tax rate is 32.5% (plus 2% Medicare levy) and you’re earning $100,000pa, rather than paying an extra $750 a month into your mortgage, you could salary sacrifice $1,145 a month into your super.

After 15% super contributions tax, this boosts your super balance by $973 a month. Five years of this strategy gives you an extra $58,395 in your super account, plus the earnings.

“Once you are over 60, if you are still working, you can use tax-free pension payments from your super to help boost repayments on your mortgage. Then, once you retire, you can withdraw a tax-free lump sum to pay off the remainder,” Mr Dunbar explained.

So, you can still enter retirement with little or no debt using this strategy.

→ Related: Mortgage vs super: Where should you put your extra money?

5. You don’t have an emergency fund

If you have been directing all your extra cash towards your mortgage and are close to paying off your loan, it can make sense to keep that extra money as savings rather than paying out the loan in full. Ideally, you would be saving in your mortgage offset or redraw facility so as to reduce your mortgage cost.

Even though getting rid of the mortgage may give you satisfaction, doing this could potentially leave you with nothing to fall back on if you have any unexpected expenses or lose your job, for example. When you have built yourself a solid emergency fund, then there’s nothing stopping you from clearing that debt.

Mature woman looking forward
Image source: Rido/Shutterstock.com

6. You think you’ll need to borrow money again

If you are ahead in your repayments and can potentially pay off the loan early, you may want to think twice about doing this if you think you’ll need to borrow money again, for example, to pay for renovations or a new car. You’ll likely be able to access the money using redraw and therefore won’t have to worry about applying for a loan to fund these.

7. You want to enjoy a good lifestyle balance

Financial goals are important but so is enjoying your life. As the saying goes there’s no reason to aim to be the richest person in the graveyard.

“If you have a financial plan in place and know you are on track to achieve your goals and be financially independent, then why defer that lifestyle and enjoyment until retirement? Work with your adviser to take an extra trip each year, have some nice dinners, take the kids to more regular activities – whatever makes you happy,” suggested Mr Dunbar.

“Because one thing is for sure, we’re either here for a short time or a very short time, and we should focus on enjoying life while we can, even if it adds a few years to the mortgage repayment schedule.”

Cover image source: Watchara Ritjan/Shutterstock.com


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This content was reviewed by Editorial Campaigns Manager Maria Bekiaris as part of our fact-checking process.


Effie has more than two decades of experience helping Aussies make the most of their money. Prior to joining Canstar, Effie was the editor of Money Magazine She is an author and one of Australia’s leading personal finance commentators.

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