Once you contribute money to your super you generally can't access it again until you retire. So it's important to think about timing. If you'll need the money before you retire, paying off your mortgage is a better option because you may be able to redraw the money or access the equity in your home.
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.
Whether or not you should use your super to pay your mortgage will depend on factors such as the interest rate on your mortgage, the expected earnings from your super, tax on super withdrawals and the level of income you require in retirement.
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.
From a financial perspective, it's usually best to invest your money rather than funneling extra cash toward paying your mortgage off faster. Of course, life isn't just about cold, hard numbers. There are many reasons why you might choose either to pay your mortgage early or invest more.
Con: You may have to pay a prepayment penalty
Potential prepayment penalties are another drawback to consider. Some lenders charge fees if you pay off your loan too early, as it eats into their ability to make a profit. These fees vary, but generally, it's a small percentage of the outstanding loan balance.
The biggest reason to pay off your mortgage early is that often it will leave you better off in the long run. Standard financial advice is that if you have debts (such as mortgages), the best thing to do with your savings is pay off those debts.
Paying off your mortgage early could free up your cash for travel, retirement, or other long-term plans. Being mortgage-free may insulate you from losing your home if you run into financial difficulties.
Paying down a mortgage quickly reduces the total amount of interest you pay over the life of the loan. This logic is also behind arguments favoring shorter maturity mortgages. For example, a $500,000 mortgage at 5% over 30 years has monthly payments of approximately $2,684.
Another advantage of overpaying is that it can decrease the property's loan-to-value (LTV), meaning that better rates may be secured when it does become time to take on a new fixed deal. But overpaying is not for everyone. It is important to ensure you always have enough cash in savings in case of an emergency.
The ASFA Retirement Standard Explainer says a comfortable retirement lifestyle would need $640,000 in super for a couple, or $545,000 for a single person.
Withdrawing some of your super early is a big financial decision that you shouldn't make lightly. It could leave you with less money for your retirement and impact your insurance within super. So before applying, stop and think about the potential consequences of accessing your superannuation early.
For one, having one debt paid off means being able to handle any short-term debts such as credit cards. You also end up saving money if you pay off your mortgage earlier, avoiding additional interest that would have otherwise accrued.
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.
Most experts believe you should have enough money in your emergency fund to cover at least 3 to 6 months' worth of living expenses. Start by estimating your costs for critical expenses, such as: Housing.
If you're like most people, paying off your mortgage and entering retirement debt-free sounds pretty appealing. You should aim to have everything paid off, from student loans to credit card debt, by age 45, O'Leary says. Paying off your mortgage early means foregoing adding more to your investment portfolio today.
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.
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.
When you're debt-free, you may experience: Emotional relief. You may feel liberated and relieved to no longer have the stress of paying off debts. You've now broken free from difficult times in the past, and you're able to move forward with better habits and financial freedom.
You Could Make Higher Returns Elsewhere
Let's say, for example, your mortgage rate is lower than what you may earn with a low-risk investment over a similar period. In that case, you may be better off keeping your mortgage and investing any available funds elsewhere, such as the stock market.
As further Fed rate hikes remain uncertain, organizations like Fannie Mae and the Mortgage Bankers Association have forecasted declining average rates on 30-year fixed-rate mortgages throughout 2023, continuing into the first quarter of 2024.
It might make sense, for example, to put the money into paying off your mortgage early if you struggle with keeping money in the bank. Your home can be a forced-savings tool, and making extra mortgage payments can save you thousands of dollars in interest over time, plus help you build equity in your home faster.