It Makes Sense To Have A Mortgage, And Here’s Why
Mortgages are specially designed loans for homeowners, and without them, many of us would not be able to own our homes today. The main problem that people have with taking out a mortgage is the fear of debt-bondage.
The average lifespan of a mortgage is 30 years. This means three decades of making monthly payments, which can seem overwhelming. But as there is always a trusted mortgage broker in Sydney or in your local area, we’re here to set the record straight and tell you there is little to fear with having a mortgage. In fact, it can be useful financially.
Since there is also interest charged on mortgages (as with all bank loans), most people believe that paying back the home loan as quickly as possible makes the most financial sense. However, we suggest that retaining a mortgage is a better idea than paying it off as quickly as possible.
- Low Interest Rate
As loans go, a mortgage is one of the lowest interest rates you’ll ever receive. If you take out a mortgage at a low rate, like 3-4%, then you can fix that amount over the next 30 years. In the meantime, if interest rates rise to 5-6%, you can invest and earn good returns whilst still locked into only paying 3 or 4 percent on your home loan. This is a guaranteed return on your mortgage money, and so no need to pay off your mortgage so quickly if you can actually make money from it.
- Preserving Liquidity
This one can be difficult for people to get their head around, and the majority of people often underestimate the importance of liquidity. The main idea behind liquidity is that the amount of money that a person has that is not included in investments or consumer goods. If a person pays off their mortgage earlier than the length of its term, they are also reducing their liquidity.
In other words, it would be more beneficial to keep the money rather than plough it into paying off the mortgage too soon. The money could be used to contribute to buying other major purchases, for example, a new car, rather than needing to go into debt. It makes more sense to keep the mortgage as the main debt and try to avoid accruing other debts, rather than paying off the mortgage as quickly as possible but going into debt when buying other things.
- Investing the Extra Money Elsewhere
If a person does have enough money to consider paying off their mortgage sooner, then they should consider doing something else with the spare cash. Whilst it is tempting, as we’ve already suggested, paying off a mortgage as soon as possible is not necessarily to most beneficial use of this extra money.
Investing the money into something not related to housing may be a sensible idea. For example, you could put the money into the stock market, which could give a return of anything up to 8%, which is double the rate of 4% that we’ve already discussed. However, there are certain risks involved to any kind of investment that you should be aware of before putting the money in.
Whether you choose to invest your money or keep it as liquidity, we certainly feel that keeping a mortgage is the most sensible idea, whilst interest rates are so low. Being indebted to a long-term loan may seem daunting, but for many reasons, it also makes financial sense.