Owing your bank a big sum of money can be stressful, especially when you have something as substantial as a home loan to pay off!
Maybe you have just gotten a substantial pay raise, or maybe you have just won the lottery (congratulations, either way!) and have extra cash on your hands, the idea of paying off your home loan early to remain debt-free in your later years sounds appealing!
But, should you actually do it – paying off your home loan early?
Before you decide to pay off your home loan ahead of schedule, jot down the pros and cons of early home loan settlement, so you know what to expect!
‘The Good’ – Benefits of settling your home loan early
Save on interest
One of the main benefits of paying off your home loan early is that you can save up the money on paying the interests in the long term!
Well, this is because usually, the longer your home loan tenure, the longer the interest (and thus the bigger amount) you will pay over time!
Yet, in some cases, your loan interest could be pre-computed and calculated upfront at the beginning of the loan tenure, so the amount of interest you will end up paying is considered fixed. In this case, paying off your home loan ahead of schedule or on schedule may not matter as much.
Improve your credit profile
Paying off your home loan and getting out of debt fast, is one way to improve your credit scores.
One of the reasons that borrowers have poor credit scores is because they fail to pay their loans / debt on time. Paying off your home loan ahead of schedule eliminates any risk you may have of making late, or even defaulting on monthly installment repayments.
Achieve debt-free status earlier
This is a point of early home loan settlement, isn’t it? By paying off your home loan earlier, you are one-step closer to achieving debt-free status earlier than your schedule!
Just like having to lug an extremely heavy emotional baggage around, having a lot of debt (any kind of debt) can be mentally and physically exhausting, So, if you have the means to pay off these loans ahead of schedule, it can surely help with your financial and mental freedom!
On the other hand, if you live paycheck-to-paycheck and find it impossible to settle your home loan early, don’t worry! You just have to remember to at least, make repayments on time and not default on the loan.
Free up funds for other expenses
Imagine the month after you have settled your home loan early, and do not need to fork out the money for it anymore…now, you are officially *insert home loan monthly repayment amount* richer every month!
Paying off your home loan early gives you the opportunity to use those extra funds for other purposes. For investments, as your emergency savings, pay off other debt, and more!
If you’re a first-time property investor looking to kick it off on the right foot, do avoid these 10 common first-time property investment mistakes at all costs!
‘The Bad’ – Disadvantages of paying off your home loan early
Less money in your pocket
On the flip side, if you have just spent all your extra cash on paying off your home loan early, things may backfire. Especially if an emergency pops up and demands a large amount of your money.
Thus, before deciding to pay off your home loan early, you should not use money that is coming out of your emergency fund, because, well…it is an emergency fund, and should remain untouched unless in times of emergencies!
Lose the opportunity for other financial needs
There is an understanding in home financing that basically means, when you pay off your home loan ahead of schedule, you’re actually paying an opportunity cost – you are losing something (opportunity for other financial needs) as a result of gaining something else (being debt-free earlier).
This could mean putting your child’s educational fund or potential investment funding, into paying off your home loan early.
So the advice here is – as much as we want to achieve debt-free status early, do not do it at the expense of larger goals that have significant life impact to you and/or your family. If you are already planning to save up to build another fund (child’s education fund, etc.), do continue on with that plan instead of paying off your home loan early.
As appealing as it is to achieve debt-free status earlier in life by paying off your home loan ahead of schedule, you should always check with your bank or lender to see if there are any terms on early or extra repayment.
Some loans may incur penalties or fees on borrowers who intend to pay off their home loans ahead of the loan tenure. It may not be worth it if you have to pay extra penalties just to settle your home loan early.
In some cases, if your home loan interest are pre-computed at the beginning of the loan tenure, the amount of interest you will end up paying is considered fixed. As such, paying off your home loans early or on time, may not have a significant effect on your interest savings.
Insufficient fund for other debts
Do you have other debts besides your home loan? For example, vehicle loans, student loans, personal loans or credit card debt?
Before channeling your extra cash into paying off your home loan earlier, consider and compare the annual percentage rate (APR) of all your loans. It is recommended that you pay off debts with higher APRs first, to save money in interest before cashing it all on your home loan.
Paying off your home loan early – Yay, or Nay?
Conclusion – if you have the means to do it, settling your home loan ahead of its scheduled loan tenure could save you in interest payments. But, this may not be the best idea if you have to do it at the expense of your life savings.
Whether you decide to pay your home loan on time, or pay it off ahead of time, do make sure that you are aware of the pros and cons, as well as the financial consequences of either option.
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This article is intended to convey general information only. It does not constitute advice for your specific needs. This article cannot disclose all of the risks and other factors necessary to evaluate a particular situation.
Any interested party should study each situation carefully. You should seek and obtain independent professional advice for your specific needs and situation.