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Granted, this is not a message that you hear very often and I am certainly not advocating that you take your credit card out for a day of unfettered retail therapy!
For most people, the biggest debt they will have in their lives is a mortgage, and many look forward to the day that they will be mortgage free. A friend recently told me how her main financial goal was to have her mortgage paid off before she was 45. Her strategy was to eschew all other assets and channel all her investment funds towards that aim. While that sounds like a commendable plan, with interest rates at an historic low, does it make sound financial sense?
Equity in a house is a good thing to have but property is an illiquid asset – you can only get money out of it by selling or borrowing against it. Low interest rates mean that for many people, it may make sense to retain a mortgage with relatively low monthly payments than to divert assets to pay it off which may give a better return elsewhere.
Paying off your mortgage may not make financial sense if:
You have other high-interest debts – Always prioritise repayment of debts according to how high the interest payments are. Credit cards and other high-interest loans will almost certainly be more costly than your mortgage so get those paid off first.
You will incur heavy financial penalties for early repayment – Check the small print of your mortgage deal to see if this is the case.
Your employer contributes to your pension – My friend’s mortgage rate was 2.85% but her company would match her pension contributions up to 5% of her earnings,. This is a much better use of her money, especially as pension contributions also benefit from tax relief.
Your investments can produce a yield higher than your mortgage rate – If your investments can outperform the interest rate you pay on your mortgage then it simply doesn’t make sense to divert funds that will make you more money.
Mortgages are not the only loans where early payment may not be advantageous; student loans are often similar in that the low interest rates often apply. Equally paying off your mortgage, student or other loans may be the best thing – it depends on your personal circumstances.
You need to look at the bigger picture and often talking to a financial consultant can help you make sense of all the different aspects and permutations. If you would like assistance assessing your personal circumstances contact us for a free, no obligation assessment of your finances.