- Emma Parker
- November 17, 2020
Prepayment of home mortgage is commonly viewed as a good financial decision with only a few implications. It is sure to create a significant impact on your financial situation based on various aspects. However, the right side is known to many, but only a few understand its negatives.
The terms and conditions for the loan are primary determiners whether prepayment is a wise decision or not. You may get tempted by the relief from monthly instalment. But the prepayment charges can increase the overall cost of the loan.
Here are some pros and cons of early payment of your house mortgage help you solve this repayment conundrum.
These are some possible advantages for the prepayment of your house mortgage.
- No Prepayment Charges
Check the terms and condition of the loans to determine if there are any prepayment charges. If not, you can make the payment to enjoy the below-mentioned advantages with no extra cost. Often these terms are overlooked at the time of mortgage application and loan approval Londoncashlender.
- Reduced Principal Amount
The primary benefit of making an early payment is the reduced principal amount. You owe less money, which increases your eligibility to take more loans. Also, the stress will decrease, and the equity in the home will increase.
- Reduced Tenure
The loan duration may get reduced with the prepayment; therefore, you will get complete ownership earlier. This allows you to shift the focus on other financial goals. You can start saving for the retirement funds and emergency fund.
Shorter terms also provide you with the opportunity to start repaying the other debts at a faster rate. Also, you have the opportunity to invest in more assets with another loan.
- Lesser Instalments
You will have to pay lower instalments each month if you decide to retain the loan tenure. The lesser instalment will relieve the stress on your monthly budget. You can spend more on other essential expenses.
- Avoided Future Hike in Interest Rate
The lender may increase the interest rate in future based on the market status. This will increase the instalments and overall cost of the loan. Prepayment of the mortgage provides a relief from these interest rates hikes courtesy of lower principal amount.
Since the amount to be paid is less, either the repayment will take less time or the instalments will be lower. Thus, reducing the impact of increased interest rates. You can save plenty of money from this possible problem by repaying the complete principal amount.
- Improved Credit Ratings
Prepayment of loan mortgages has a positive impact on your credit ratings. For lenders, you will be a responsible borrower who can manage to repay the loan with no trouble. This increases your chance of getting reasonable offers with attractive interest rates.
Even if you have bad credit ratings, there are guaranteed payday loans from direct lenders with no credit check available. These loans do help you with instant cash but have higher interest rates.
There are certain disadvantages as well that come with prepayment of home mortgage. We have mentioned the prominent ones below.
- Prepayment Charges
As mentioned above, the terms and condition play a significant role in prepayment decision. Early payment may cost you more than the original loan amount because of the charges involved. It is recommended to calculate these expenses before you make any payment.
There is a very good possibility that you may lose the tax benefits that come with a mortgage and interest repayment. You can also use the money to invest in plans that save money on taxes instead of mortgage repayment. Compare the money you will save on interest with the taxes you might have to pay to get a clearer picture.
- Less Liquidity
With the cash in your bank account, you will have an additional asset in your balance sheet. Once the money is used for prepayment, you cannot use it for some unexpected expenses. In this scenario, it is better to keep the mortgage for a diverse portfolio.
- Not the Best Loan to Clear Early
You might have other liabilities or loan that charges higher interest than the house mortgage. You can save more money by paying off these loans early instead. Also, the monthly budget will have a lesser amount to allocate for the debt repayment.
- Opportunity Costs
When you use the money for mortgage prepayment, you lose the opportunity to invest it elsewhere. You could have made more money than the savings on interest rates. Consult your financial advisor for a better investment.
- Potential Loss Because of Reduced Interest Rates
The mortgage interest rates might decrease in the future. Prepayment means you will lose the benefits as there will be a lower principal amount to apply new interest rates. Holding on to the mortgage save you money with this risk.
To sum up, prepayment of loan comes with its benefits and disadvantages. You might think of using the money elsewhere is a better decision. At the same time, reduced liability may increase your financial stability to a great extent. You can consider the above pros and cons combined with your current financial situation to make the right decision.