Good reasons to pay off your home loan
The most compelling reason to accelerate the payment of your home loan is the savings you’ll make on the interest component of the repayments. South African mortgage rates are currently high, with the average rate at approximately 10%. Depending on the value of your home, the interest component of your home loan could amount to a significant cost.
Perhaps more importantly, however, being bond-free provides you with a sense of relief. Who doesn’t feel good after paying off debt? Especially if you are close to retirement and don’t have significant retirement funds, it may be best to kill your mortgage. If you’re expecting your expenses to decline in retirement, think again: the general inflation rate is high and the medical inflation rate is even higher.
And some reasons why you might not want to
There are also good reasons why you may not want to pay off your mortgage.
If you do have surplus cash each month, you could use it to top up long-term retirement investments such as retirement annuities. Not only are the contributions tax-deductible, but the growth within the fund is tax-free. By giving your RA a boost, you’re effectively accelerating growth within the fund at a rate that will likely be higher than the interest rate on your home loan. RA’s have become increasingly attractive now that retirement funds are allowed to invest up to 45% of their assets offshore.
Investing in retirement products is especially important for entrepreneurs, who may need protection from creditors should their businesses go belly-up. Retirement investments such as RAs, pension funds and provident funds are not accessible to creditors, but your home is.
Over and above providing for retirement, it’s essential to diversify your portfolio by investing in assets other than property. Diversification is key to reducing the risk in your portfolio of investments. You also need to consider the liquidity in your investment portfolio. If you decide to accelerate the payments on your loan, the liquidity of your investments is reduced. Homes can take months to sell, whereas stocks and unit trusts can easily be sold, in case of unforeseen emergencies.
Two other considerations
- Your home might be your castle and pride, but your mortgage repayment shouldn’t exceed approximately 30% of your gross monthly income. If it does, it’s likely that you’re not diversifying adequately or you can’t actually afford your home.
- If you have a mortgage on a property that you rent out, it may be best to hang onto the debt, as the interest component is tax deductible (as are other expenses in maintaining the property).
The choice is yours, but do get advice
Deciding whether or not to pay off your home loan early is a big deal. The best course of action depends on your personal circumstances, including the stability of your income, your future earning potential, the time horizon of your other investments and the prevailing economic climate and interest rates.
It’s not a decision to make on a whim, and it’s definitely not a decision you should make alone. This is where we come in. Of course, you feel emotional about your home – everyone does, even financial advisors! But we’ll help you see beyond the emotion so that you can make the right investment decisions that will guarantee you and your family long-term financial flexibility and freedom.
Are you lucky enough to be debating whether to kill your mortgage? Contact us for advice.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.