There has been a recent trend in people trying to repay loans and mortgage early. There are advantages and disadvantages to doing this and if you are wondering whether it is the right decision for you then it is a good idea to think about these.
Advantages of Repaying Early
There are quite a few advantages to repaying your mortgage early but we have chosen to focus on just two of them.
- Cheaper mortgage – the longer you keep a loan; the more expensive it will be in most cases. This is because loans are generally charged using interest. The interest is charged for each day that you have the loan for and so if you repay it early, the amount of interest that you repay will be less. In most cases this will mean that the mortgage will be cheaper, however, some lenders will charge an early repayment fee for doing this. This could be a massive sum of money, which will not make the mortgage cheaper, but it varies as some lender do not charge one at all and some charge just a small amount of money.
- Reduce debt – it can be good to get rid of some of your debt. Not only can this just generally feel good because you have paid something back in full, but it can mean that if you want to borrow for something else you might be more able to do it. Not only will your credit report be better but you will be more able to manage more loan repayments as you no longer have to make mortgage repayments. It can also feel good to know that you will not have to find those monthly repayments. For some people a debt can feel like a burden hanging over them and clearing it quicker can be a really positive experience.
Disadvantages of Repaying Early
You may think that there would not be disadvantages to repaying early bit there are some.
- Cheap debt – a mortgage can be a relatively cheap debt compared to some other forms of borrowing. Although you have a mortgage for a long time so the cost adds up, the interest rate can be a lot lower than things like overdrafts or credit cards. This means that it could be sensible to repay these rather than the mortgage. So, if you have a selection of different debts, then you should compare the cost of them to see which will be the best to repay.
- Can use money for other things – if you are using your money to repay your debt, then you are not able to use it for other things. If you are cutting back on luxuries such as jewellery or cushions, then this will probably not matter but you may be cutting back in areas that are important. If you cut back on buying books for your children to help them pass their exams, cut back on training courses to help your progress in your career or cut back on medication, vitamins or gym subscriptions and you are then less healthy. So, it is important to get a balance.
So, as you can see it may not be as straightforward as you think. Make sure that you are choosing carefully when deciding which loans to repay and make sure that you are making the right decision to repay it. Think about where you will be cutting back and what you will be going without and whether it is sensible to do this. Also consider how long you will need to be cutting back in order to repay early and whether that will be something that you will be able to manage.