Do you own a home and make a fixed monthly payment on your mortgage? Then this article is of interest to you. We set out whether it’s smart to make extra repayments on your mortgage.
Apart from the advantages, there can also be disadvantages to extra repayment. Hold your horses, make a cup of coffee, and read along.
Benefits of paying off extra on your mortgage
Less interest over entire term.
The whole idea of providing a mortgage to the bank – because that’s what it is: you provide a mortgage in exchange for financing, the mortgage is your collateral – is that they make money on the loan. They earn that through the interest you pay. If you have a mortgage of 3 tons, which you pay off in 30 years, you pay interest on the remaining amount of the debt for 30 years. This can add up considerably. So when you repay, you shorten the term and thus the amount you pay in interest goes down. So over a long run, this means saving money anyway.
Lower monthly costs.
When you make extra repayments, you lower your debt, which means you pay less monthly in principal and interest. How much you save depends on the amount of your mortgage and your interest rate.
Lower interest %.
If the amount of your debt is 85% of the WOZ value, the bank may reward you by reducing your interest rate. This may be a reason to make additional repayments. Whether your bank rewards you and for how much, you need to find out from the relevant lender.
Entitlement to more care allowance.
If your income does not exceed 29,562 euros per year as a single person, or 37,885 euros if you are a couple, you are entitled to care allowance. Only: then you cannot have more than 114,776 euros (or 145,136 euros for tax partners) in savings. If you do have it, then you can use some of that money to make additional repayments so that you still qualify for that health care benefit.
This is because in this case, your own home does not count as part of your assets (it is not counted in Box 3 for tax purposes), but your cash does. So should you have a nice savings and an income no higher than the amounts mentioned, we would say: pay off that mortgage!
Mindset thingy.
It can be a nice feeling that your mortgage is a lot less than the value of your home. Sleeps very well. Thereby, on a psychological level, it is nice to see that debt getting lower and lower.
Disadvantages of paying off extra on your mortgage
Your money is “stuck.
Not just fixed in the sense of “fixed in bricks,” but also in the following way: suppose you have a nice excess value due to repayment. You decide to move and keep a lot of cash after the sale. You decide to buy a new house. Then you must put that pot of cash into your new home within three years. Shouldn’t of course, but if you don’t then this amount will be deducted from what you are entitled to when it comes to the mortgage interest deduction. So suppose you were able to free up 50k cash when selling your house. You buy a new 2-ton house. You do NOT put that 50k into your new house, then you get mortgage interest deduction on 150k, instead of the entire 2 tons.
You can’t just book it back.
Simple, but consider this. Once you pay off your mortgage, you can’t just call it back if you suddenly need money. Our advice: always keep a nice little buffer in the savings account.
Opportunity costs
Nice hip investment jargon, but what is meant by this: suppose you repay an extra 10 thousand euros. You will save 40 euros per month (hypothetically). But if you had invested this 10,000 in the stock market, you might have made 50 euros a month. Missed profits, missed earnings.
Conclusion
Go do the math yourself. And put your hand on your heart. Do you have quite a lot of savings or would like to make additional monthly repayments on your mortgage? Above all, do what you feel comfortable with. Your money, your life. There is not 1 best way. There are multiple paths to financial independence. Your personal situation, your wishes, your goals and what makes you sleep well are leading.
So, what do you feel good about? Do you repay extra, or have you ever repaid extra?
