What happens if I pay off my mortgage early?

Whether you’ve come into some extra cash or have been consistently making some extra payments on your home loan, you may come to a point where you’re faced with paying off your mortgage early.
Ava Crawford
Written by
Ava Crawford
Imogen Baxter
Reviewed by
Imogen Baxter
Last updated
August 12, 2023
0 minute read
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dining room in an australian house where the mortgage has been paid off early

Whether you’ve come into some extra cash or have been consistently making some extra payments on your home loan, you may come to a point where you’re faced with paying off your mortgage early.

So what exactly happens when it comes time to close out your mortgage debt, and are there any things you absolutely need to know before you wind up debt-free? We will break it down for you.

How do I pay off my mortgage early?

There are several ways you can pay off your mortgage early, whether you come into some extra money or consistently make additional repayments on top of your monthly payments.

When you enter into a mortgage with a lender, you agree to pay off a borrowed amount of money in instalments over time. On top of this, you will pay mortgage interest by paying an interest rate on the money borrowed. These repayments are usually paid monthly over the agreed loan term (usually 20-40 years).

Some mortgages allow for features like additional repayments and offset accounts. If you can make additional payments on your home loan, you may be able to finish paying off your loan balance in a shorter term than originally agreed. Be aware that some mortgage lenders may attach fees to the ability to make extra repayments, and there may be a limit to the amount you can make.

This can be good for borrowers as the shorter the term they make mortgage repayments, the less they will have to cough up in interest payments over time. Depending on any caps on extra repayments, you may be able to switch up your monthly repayments to make payments as frequently as biweekly.

You may also end up able to pay off your mortgage loan early by way of a single lump-sum payment. This is most common when people come into money suddenly by way of inheritance, redundancy, payout or other lump-sum payment.

You may want to seek financial advice before using a large lump sum to pay off your mortgage early. While it may be satisfying to check off that particular financial goal and provide plenty of peace of mind, there may be other options worth factoring into your financial plan.

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Are there any concerns about paying off my home loan early?

As a disclaimer, paying off your mortgage early could come with a couple of side effects to consider.

Many home loans have prepayment penalties for paying off all or part of the loan amount early. Depending on your financial situation, this could become more expensive than it’s worth. This could be the case if there is a fee for every extra mortgage payment, and it adds up if you make additional home loan repayments as often as weekly or fortnightly.

Homeowners who aren’t easily tempted by their home equity may actually be better served by keeping a small amount owing on their home loan. You could leave a small amount owing on the property, putting money in an offset account.

If you buy real estate and turn your existing place into an investment property, refinancing to an interest-only home loan could be an option. Going this route, you can claim the interest on your investment home loan as a tax deduction. This way, you can take advantage of the tax refunds available to investors.

What happens when I am about to finish paying off my home loan?

When it comes time to draw those monthly mortgage payments to a close and finish paying off your home loan, you’ll need to be prepared.

Once you’ve factored in any early payment fees or prepayment penalties from your lender, you’ll have to discharge your mortgage. This involves notifying your lender of your intentions and signing a Discharge Authority Form.

FAQs

How will extra repayments change the length of my home loan?

If you are considering making additional payments but want to know how they’ll impact your loan term, you can enter your monthly payments and mortgage interest rate (variable or fixed rate) into a mortgage calculator and your proposed extra repayments. This will help you predict how quickly you’ll pay off your loan with additional repayments and how to maintain cash flow throughout.

Are there any alternative options to paying off my mortgage early?

While you might be keen to pay off your mortgage early, you may want to consider other options better suited to your financial situation. Since a home loan has a lower interest rate than many shorter-term loans, you may want to pay down any other forms of debt before you pay off your mortgage. This can include debts accrued across any area of your personal finance, like credit card debt or personal loans. Then, depending on your need to maintain an emergency fund and access to a line of credit, you may want to keep some money on your home loan. This could be helpful if you find yourself in need of money and have to draw down on your home equity suddenly.

Depending on your personal circumstances, you may be better served by stashing extra cash in a term deposit or high-interest savings account or looking to home-buying so you can refinance your current home into an investment property.

You may also want to look into other long-term debts, like student loans.

How many extra mortgage payments can I make?

The amount of extra mortgage payments you can make will depend on the conditions of your home loan and who your lender is. Some lenders will allow for extra repayments at no extra cost, meaning you can add extra funds whenever you see fit. Others may allow a certain monthly limit or require a fee for any additions. Be sure to see the terms of your mortgage.

Can I redraw my loan balance if I need emergency funds?

If you’ve been making extra repayments but find yourself suddenly in need of extra money, some home loans will allow you to access a redraw facility. You’ll want to check whether this is available on your home loan before you make additional payments, as you could get stuck with no access to it. Some lenders may also charge a fee for accessing a redraw facility.

Will paying off my mortgage early impact my credit score?

Since your credit score reflects any debt you have incurred, paying off your mortgage early could make a great deal of difference to your credit score. Note that making regular and timely repayments to your home loan also contributes to your creditworthiness and ensures you have a record of keeping up loan repayments over the long term. Paying off other debts, like credit card debt, could be even more beneficial to your credit score.

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Disclaimer
This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
Prepared by OwnHome Services Pty Ltd ACN 664 492 059. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.
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