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.
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.