Here are six reasons not to pay off your mortgage early if you happen to find yourselves with extra funds…
Interest rates on mortgages are usually lower than other credit facilities.
A fixed mortgage interest is usually low and as the name suggest is fixed for the period. In essence, while the mortgage payments will remain the same for years, other consumable debts such as car loans and credit cards surely will not. Hence, it would serve you better to pay off these debts as priority over the mortgage. No one likes to see the bailiff return for its furniture or the bank repossessing that Audi.
Placing extra funds in higher yield investments can provide additional income and liquidity.
This can help to increase your wealth. What is the opportunity cost in investing funds in the stock market, bonds and other higher yielding investments, as opposed to paying off your mortgage? The World economy has continued to improve over the last few years since the financial crisis in 2008. Therefore, there are opportunities to make money, as opposed to tying up all your assets in paying off the mortgage. Owning the title is good, but is it giving you returns like that of the Jamaica Stock Exchange, Dow Jones, Standard &Poors or London Stock Exchange?
More Real Estate
If you find yourself with additional funds, consider purchasing a smaller property for investment purposes which would afford you an opportunity to earn additional income from rent and capital appreciation.
Invest in the future education of your children or yourself.
If you have a young family you can put extra cash in special educational savings products for tertiary education. This will reduce the pressure of future high tuition for university education for your children. And if you do not have children, perhaps you may want to invest some of that eduction in yourself. Self development is never a waste!
Beef up the emergency fund by keeping some of it in the bank.
It is always good to have cash in the bank for emergencies and unexpected changes in lifestyle. A title free of mortgages will take you some time to access cash for emergency reasons.
Planning for retirement
Most pension plans have the options for you to contribute extra towards your retirement fund. Hence, putting that extra cash towards retirement would allow you to take advantage of the power of the compounding effect. Use your extra funds to select such options.
Conclusion
Most mortgage loans have a penalty for early payments but there is usually a notice period. All you have to do is to give the institution written notice of your intention to pay off mortgage early and avoid the penalty costs. Renee Whitehorn, Marketing Manager of CIBC, explains that although the decision for early repayment is dependent on the individual’s financial and employment situation, “The Bank is not averse to a client paying off his mortgage early but will normally charge a penalty fee if the notice period specified in the mortgage agreement is not adhered to. The amount of the penalty is also specified in the said mortgage agreement.”
If, by chance, an individual is very adverse to debt, he/she could consider putting aside a portion of the funds (example 5 years worth of payments) in an account that would be strictly for mortgage payments and invest the rest. This gives a level of flexibility to exercise other opportunities while having that peace of mind of having the lump sum mortgage payments safe. Whitehorn advises, “Mortgage loans accrue interest over the life of the loan so in the event a borrower could use cash resources to settle the debt , some of those costs would be avoided. On the other hand, their cash holdings could be invested or otherwise productively employed (e.g. starting a business) to generate additional income that could service the mortgage and generate substantial funds for savings.”
The reasons above may not guarantee “peace of mind” but what it affords is an opportunity to do more than just pay off a mortgage. It provides you with options to pursue other goals and dreams that owning the title of your home may not have afforded you.
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Here are six reasons not to pay off your mortgage early if you happen to find yourselves with extra funds…
Interest rates on mortgages are usually lower than other credit facilities.
A fixed mortgage interest is usually low and as the name suggest is fixed for the period. In essence, while the mortgage payments will remain the same for years, other consumable debts such as car loans and credit cards surely will not. Hence, it would serve you better to pay off these debts as priority over the mortgage. No one likes to see the bailiff return for its furniture or the bank repossessing that Audi.
Placing extra funds in higher yield investments can provide additional income and liquidity.
This can help to increase your wealth. What is the opportunity cost in investing funds in the stock market, bonds and other higher yielding investments, as opposed to paying off your mortgage? The World economy has continued to improve over the last few years since the financial crisis in 2008. Therefore, there are opportunities to make money, as opposed to tying up all your assets in paying off the mortgage. Owning the title is good, but is it giving you returns like that of the Jamaica Stock Exchange, Dow Jones, Standard &Poors or London Stock Exchange?
More Real Estate
If you find yourself with additional funds, consider purchasing a smaller property for investment purposes which would afford you an opportunity to earn additional income from rent and capital appreciation.
Invest in the future education of your children or yourself.
If you have a young family you can put extra cash in special educational savings products for tertiary education. This will reduce the pressure of future high tuition for university education for your children. And if you do not have children, perhaps you may want to invest some of that eduction in yourself. Self development is never a waste!
Beef up the emergency fund by keeping some of it in the bank.
It is always good to have cash in the bank for emergencies and unexpected changes in lifestyle. A title free of mortgages will take you some time to access cash for emergency reasons.
Planning for retirement
Most pension plans have the options for you to contribute extra towards your retirement fund. Hence, putting that extra cash towards retirement would allow you to take advantage of the power of the compounding effect. Use your extra funds to select such options.
Conclusion
Most mortgage loans have a penalty for early payments but there is usually a notice period. All you have to do is to give the institution written notice of your intention to pay off mortgage early and avoid the penalty costs. Renee Whitehorn, Marketing Manager of CIBC, explains that although the decision for early repayment is dependent on the individual’s financial and employment situation, “The Bank is not averse to a client paying off his mortgage early but will normally charge a penalty fee if the notice period specified in the mortgage agreement is not adhered to. The amount of the penalty is also specified in the said mortgage agreement.”
If, by chance, an individual is very adverse to debt, he/she could consider putting aside a portion of the funds (example 5 years worth of payments) in an account that would be strictly for mortgage payments and invest the rest. This gives a level of flexibility to exercise other opportunities while having that peace of mind of having the lump sum mortgage payments safe. Whitehorn advises, “Mortgage loans accrue interest over the life of the loan so in the event a borrower could use cash resources to settle the debt , some of those costs would be avoided. On the other hand, their cash holdings could be invested or otherwise productively employed (e.g. starting a business) to generate additional income that could service the mortgage and generate substantial funds for savings.”
The reasons above may not guarantee “peace of mind” but what it affords is an opportunity to do more than just pay off a mortgage. It provides you with options to pursue other goals and dreams that owning the title of your home may not have afforded you.
Share this post: