Should I overpay on my mortgage? This is probably a question you’ve asked yourself if your financial situation has improved recently, either through a promotion, an inheritance or simply consolidating your debts.
The decision to make extra payments on your home loan may depend on many factors, so ensure you talk to us before taking the plunge. Nevertheless, here are some of the benefits you could see.
1. You’ll pay off your home loan quicker
The number one reason most people want to overpay on their mortgage is to reduce the amount of debt linked to their home and clear the loan quicker.
It’s important to check what limits exist on how much you overpay, however, as you may be restricted to a certain percentage or dollar amount each year. You may even be penalised if you exceed this amount.
2. A better option than saving
The Reserve Bank of Australia key cash rate is at record lows of 1.5 per cent, which often means two things: your mortgage payments are probably reduced, and your savings are providing anaemic returns.
As such, the savings on interest you could make by overpaying your mortgage may even exceed what you are able to earn by simply putting the money in a savings account.
3. Overpaying is flexible
You may instead be considering shortening the term of your mortgage while you’ve got your hands on some spare cash. However, you never know what tomorrow will bring, and making overpayments is usually a far more flexible option.
Cutting your mortgage terms could leave you short of money (and options!) if your financial situation changes dramatically in the future.
4. You don’t pay interest on overpayments
A certain amount of your monthly home loan payments go towards servicing the interest on your mortgage. Your interest charges will usually be higher at the beginning of the loan because you haven’t paid off much of the principal yet.
Overpayments chip away at the principal instead of the interest, which could prove very valuable when interest rates go up in the future.
Hopefully, this article will have given you some food for thought about whether making overpayments on your mortgage is the right option for you. But if you’d like further direction on what to do next or should you wish to compare home loans at any time, please contact us so we can offer more assistance.