It is important for a mortgage seeker to understand the importance of paying-off debt early, but also understand the disadvantages of doing it so.
The advantages of paying-off a mortgage early;
You’ll pay less interest in the long-term
The primary incentive to pay off your mortgage early lies in the long-term financial benefits it offers. Depending on the specifics of your mortgage, such as its type and size, the monthly interest payments can vary significantly. Although, regardless of whether you’re following an interest-only or repayment plan, extending the duration of your mortgage will inevitably result in higher overall interest payments.
You’ll be debt-free
Although your mortgage might not be your sole financial obligation, it typically represents the largest one for most individuals. And so, liberating yourself from it can greatly enhance your overall financial situation.
You’ll have more flexibility
Repaying your mortgage ahead of its due date grants you the freedom to take full ownership of your home sooner. Once the mortgage is settled, your property becomes entirely yours to use as you wish.
Disadvantages of paying-off a mortgage early;
You could get better returns elsewhere
If you’re thinking of using your savings to pay off your mortgage, it’s important to assess whether the interest you’re earning on your savings outweighs the interest you’re paying on your mortgage. In cases where your savings generate higher interest returns than your mortgage incurs, the opposite of what we mentioned previously, it may be more advantageous to retain your savings.
You could lose out on tax benefits
Considering your age and the condition of your existing pension pot, allocating your savings towards your pension may offer greater benefits instead of using them to repay your mortgage. In certain scenarios, the tax advantages associated with pension contributions could surpass the interest savings from mortgage repayment.
You may incur charges
Most mortgages come with early repayment charges (ERCs), exit fees, or both. These charges are designed to compensate lenders for the income they would have earned from interest payments over the expected loan term. When you choose to repay your loan ahead of schedule, these fees and charges help mitigate the financial loss incurred by the lender due to the early cessation of interest payments.