Hello everyone, and welcome back to part two of our mortgage series. Today, we’re tackling the pressing question: When is the best time to start repaying your mortgage aggressively?
Before we dive in, remember that everyone’s financial situation is unique, and what works for one person may not work for another. But here, we’ll explore various factors that can help you determine the best mortgage repayment strategy for you.
1. Timing and Life Stage
Many first-time homebuyers, especially those in their twenties and thirties, feel the pressure to pay off their mortgage as quickly as possible. However, it’s vital to find a balance between making mortgage payments and saving for other significant financial goals, like starting a family, making home improvements, or investing. For some, aggressive mortgage repayment may be more suitable later in life when their incomes are higher, and they have fewer familial financial commitments. There’s also a psychological layer here – you want to be ‘successful’ with your money moves, and you’ve defined that success by getting debt-free only to get into more debt later on (your next home), you may subtly start to ponder if you’ve failed in some way.
2. Mortgage Size and Future Plans
If you plan to upgrade your home in the future, reducing your current mortgage now can be a wise move, so long as you’ve factored this in to how you set up your mortgage. This approach not only saves on interest but also conditions your budget to handle larger mortgage payments when it’s time to borrow more for your upgraded home. Paying an additional sum per month on your current mortgage can prepare you for managing a significantly larger mortgage in the future. Remember the majority of your money moves happen first in the head, before it hits your wallet. Saving on interest is important, but getting ready for your next move should trump that.
3. Investment Opportunities
Focusing all your extra income on mortgage repayment may mean missing out on potentially profitable investment opportunities elsewhere – this is the opportunity cost of aggressive repayment. Keep in mind that aggressive repayment on debt, is really similar to low-risk investing (after all, a mortgage is a like a ‘bond’, or a fixed interest security, which is usually what you invest more in as you age). High-risk investments, like stocks or crypto or even start-ups, can offer significant returns over time, but they require a longer investment horizon. Balancing mortgage repayments with such financial strategies can optimize your ability to build long-term wealth.
4. Financial Security and Risk Tolerance
Some people may prefer a low-risk strategy by focusing on mortgage reduction. The payoff may not be as high as investing in high-risk ventures, but the returns are more certain.
This approach can be particularly appealing if you’re planning significant financial moves in the future and want to minimize the impact of market volatility on your finances. Have you received some sort of windfall, and at some stage over the next couple years you plan on selling to purchase a larger home? Perhaps repaying your debt faster here makes sense, considering you ought to have a much long investment timeframe, if you’re investing with any degree of risk (volatility). *It’s important here to remember, this isn’t financial advice – but you should get some if you starting to this may apply to you.
In conclusion, remember there’s no one-size-fits-all approach to mortgage repayment. Your personal circumstances and priorities will determine your most suitable strategy. Whether you choose to aggressively repay your mortgage from the start, gradually increase your repayments over time, or balance mortgage payments with other financial goals and investments, it’s essential to be mindful of your unique situation and long-term financial objectives.
For those seeking more financial insights, we’re offering a whopping 80% off our New Wealth Foundations course through May and June. Plus, join our free weekly webinars every Wednesday at 12:45 pm during these two months, where you can access the insights of two financial advisers.