I have a colleague who likes the idea that he doesn’t have to borrow a single cent and can pay off his house in one shot.
To me that usually doesn’t happen very often unless your family is rather well off or that happens in later stage in your life when you have build up substantial cash flow.
Still what can happen is as such, suppose your cost on your flat is 400k, you foot a 10% down payment of $40,000 and then you need to pay off $360,000 plus interest.
You and your spouse diligently save and have manage to build up $100,000 within 10 years.
Should you reduce your mortgage?
Here are some of the general considerations to think about and work out the sums:
- PRO – Paying off the mortgage will be considered “SAFE”. Credit becomes a difficult liability when you and your spouse lose your job. Paying off early or reducing the burden reduces that future risk
- CON – If you manage to secure the interest at an all time low right now, with interest rate likely to go up, then this becomes “good debt” and you should free up that cash flow for other purpose
- CON – The alternative to mortgage payoff is investment in equity and bonds or investment in starting a business. The rate of return of the 100k can be higher than that of not losing to future interest expense
- CON – Your risks get concentrated if you pay off mortgage, as your net worth is tied to a single asset, whereas for equities and bonds they are much more diversified
- CON – In the event of a financial fallout, you can sell part of your equities or bonds. It is perhaps harder to liquidate part of your home. You can perhaps rent out a room, depending on the supply, which could mean you have difficulty finding a tenant
- CON – Some banks penalize you for early repayments, so you really don’t have a choice (Contributed by Colin)
- CON – By paying off early, you are still staying in the house. Should there be a liquidity issue, it is difficult to channel cash flow from this entity
- Your spouse and your stability of employment will play a row in the decision you make. A stable civil servant would probably afford to not pay off at one shot and divert the money into other purpose without fearing in the future you have to worry about not being able to pay for your mortgage
Baring in mind these factors, what have your spouse and you have chosen? Are there other considerations not mention?