If you’ve ever daydreamed about a life without mortgage payments, where financial stress becomes a distant memory, you’re not alone. Owning your home outright is an Australian dream, and if you find yourself with extra dollars, the question naturally arises: should I pay off my mortgage first? After all, there are countless other tempting uses for that money.
The answer isn’t universal, as it depends on your specific long-term objectives. At First Financial, we specialise in assisting clients with financial and investment choices tailored to their unique goals, enabling them to achieve their preferred retirement timeline and lifestyle. Both the early repayment of your mortgage and strategic investment of surplus funds offer distinct advantages. In this analysis, we examine the key benefits associated with each option.
Paying off your mortgage is a guaranteed return
Opting to prioritise mortgage repayment guarantees a return through reduced interest expenses. Especially in a high-interest-rate environment, the savings accrued from early loan repayment can potentially surpass the returns generated by investments.
Making additional payments toward your mortgage accelerates the growth of your home equity. As your mortgage balance diminishes, your ownership stake steadily expands, bolstering your financial position. This home equity can be a valuable asset, affording you the flexibility to seize other financial opportunities. It can also serve as a robust safety net, providing a source of funds during unexpected financial challenges, renovations or investment ventures.
Paying off your mortgage reduces regular expenses and increases financial security Image:
The assurance of homeownership imparts a profound sense of financial security that can surpass the comfort offered by any other investment endeavour. In the event of unexpected financial difficulties, your home remains safeguarded, offering invaluable peace of mind.
Giving precedence to your mortgage also results in a reduction of regular expenses. This reduction can liberate cash flow for pursuing other financial objectives, alleviating financial stress and improving budget flexibility.
Once you’ve significantly advanced your mortgage payments or fully paid it off, you can strategically allocate your financial resources towards investment opportunities. At this stage, you’ll likely possess a substantial pool of capital, enabling a diversified investment approach that spreads risk and enhances overall wealth.
Investing offers potentially higher returns & more flexibility
On the other hand, choosing to leave your mortgage and invest in other options can also be financially rewarding.
Historically share markets have delivered long term returns in excess of the current rates on mortgages. If you combine this with, for example, additional pre-tax superannuation contributions you can not only save some tax but also earn potentially higher returns than what your mortgage is costing you.
Remember past returns are no guarantee of future returns, so the investing approach is certainly more risky than paying off your mortgage.
Invest for liquidity, flexibility and good diversification
Unlike real estate, other investments offer greater liquidity. Opting to invest instead of accelerating your mortgage payments provides you with easier access to your funds. This approach grants you the flexibility to explore additional investment opportunities or access cash in case of emergencies.
Investing also enables you to diversify your portfolio, distributing risk across assets and mitigating the impact of market volatility on your overall financial stability. Conversely, using all your funds to make extra mortgage payments could be like putting all your eggs in one basket.
Talk to the wealth experts
If you’re pondering the big question – should I prioritise paying off my mortgage first? Well, it really depends. It depends on your unique financial situation, your goals, your dreams and what matters most to you.
You’ll want to consider your lifestyle, how close you are to retirement and your marginal tax rate. The higher your marginal tax, the more likely it is that paying off your mortgage sooner will be the more appropriate option.
At First Financial, our experienced financial advisors can help. They will listen to understand your goals and objectives and then talk you through the best options. Our goal is to help you retire life ready.
Contact us to get started on the pathway to wealth today.
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