Once you've saved up enough money in your offset that's equal to your home loan balance, you have a choice; you can either continue to make your repayments towards the principal or use the funds to invest or pay off the mortgage completely.
Pay Off Your Balance In Cash: If you're able to save enough money to pay off the balance of your loan in its entirety, then this is an option. This is the option that most people think about when they want to pay off their mortgage early, even though there are plenty of other ways to handle it.
Paying your mortgage off early, particularly if you're not in the last few years of your loan term, reduces the overall loan cost. This is because you'll save a significant amount on the interest that makes up part of your payment agreement.
By making your overall mortgage term shorter, you'll end up cutting down on interest fees that you would have paid otherwise. Once you pay off your mortgage in full, you won't owe your lender any more money. The bank removes its security over your home, and then you own the property outright.
Paying it off typically requires a cash outlay equal to the amount of the principal. If the principal is sizeable, this payment could potentially jeopardize a middle-income family's ability to save for retirement, invest for college, maintain an emergency fund, and take care of other financial needs.
KEY RULE: If your mortgage rate is around the same, or higher than your savings rate, then it makes sense to overpay... That's because when it comes to savings, the reverse isn't automatically true.
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to save yourself from paying more interest later. If you're somewhere near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
There's no need to pay off your mortgage by a certain age, although one common rule of thumb says you should pay off your mortgage before you retire. The idea is that getting rid of one of your biggest monthly expenses means you need less income to cover your living expenses.
A mortgage recast is when you make a lump-sum payment toward the principal balance of your loan. Your lender will then reamortize your mortgage with the new (lower) balance. Your interest rate and term remain the same, but you can lower your monthly payments because your principal went down.
“If you want to overpay on your mortgage, you can either do so with a lump sum – for example money you have received as an inheritance or a redundancy payment – or by making regular additional payments every month,” says Chris O'Brien, product development manager at NatWest.
Paying off your mortgage early is a good way to free up monthly cashflow and pay less in interest. But you'll lose your mortgage interest tax deduction, and you'd probably earn more by investing instead. Before making your decision, consider how you would use the extra money each month.
Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund before you put your money toward your loan.
Paying off your mortgage ahead of schedule could mean significant savings, but before doing so, you should consider all potential consequences, including: How much you'll save in interest charges. Potential loss of mortgage interest tax deduction. Possible prepayment penalty.
Discharging your mortgage
You will most likely have to discharge your mortgage once you've paid off your home loan in full. The procedure of formally removing your lender from your Certificate of Title is known as a discharge. Notifying your lender is usually the first step in discharging your mortgage.
If you're on your lender's standard variable rate or you're on a tracker mortgage, there is normally no limit on how much you can overpay your mortgage by. However, fixed-rate mortgages typically have an annual overpayment limit of 10% of your TOTAL outstanding mortgage balance.
Making a lump sum payment toward your mortgage will decrease what you owe and save money on interest. If you receive some sort of windfall, such as an inheritance or a large tax refund, you can also consider making a lump sum payment toward your mortgage.
You could make smaller overpayments each month or overpay with a lump sum whenever you have the cash to hand. Either choice should lead to mortgage savings, but they both have their pros and cons. The main advantage of regular monthly overpayments is that it's more predictable.
Lump sum payments can also help winners avoid long-term income tax implications, Silvestrini wrote. However, those who elect to receive their winnings in annuity payments, or payments that are divided and issued over a fixed period of time, can end up with more in the long run.
Since most home loans are for about 30 years, this leads to older individuals paying off their loans into their retirements. The average age to pay off a mortgage in Australia is 62. If you are reaching 62, relax! There are many retirees still paying mortgages.
Age doesn't matter. Counterintuitive as it may sound, your loan application for a mortgage to be repaid over 30 years looks the same to lenders whether you are 90 years old or 40.
If a shorter term makes repayments too expensive, consider the longer 30-year term. If interest rates go up later, your repayments will increase more if you have a shorter term, so make sure you consider rate rises when you budget for your mortgage.
A common rule of thumb is that if you want to leave the workforce at 60, you will need about 15 times the amount you have calculated for your annual after-tax retirement expenses. So if you estimate $60,000 per year, then you will need $900,000.
For savings, aim to keep three to six months' worth of expenses in a high-yield savings account, but note that any amount can be beneficial in a financial emergency. For checking, an ideal amount is generally one to two months' worth of living expenses plus a 30% buffer.
The lowest recorded rate for a 30-year fixed-rate mortgage was 2.65% in January 2021,This was likely due to the effects of COVID-19.