Accelerated repayment of a mortgage can provide many benefits. This way you will become financially independent more quickly and less susceptible to the whims of the government. Nevertheless, you can also plan to save your money in a savings account, perhaps for later. In this article we discuss both options you have.
Pay off your mortgage faster
The advantage of paying off your mortgage accelerated is that you are less dependent on the bank and will experience more financial freedom. You will have a nice amount left over every month. These benefits are the motivation for many people to pay off their mortgage more quickly.
He who saves has something, they say. Whether you plan to save for a new car or a vacation, or just for later, a savings account offers several benefits. Your money is safely stored there and you also receive interest on it. Nice bonus, especially the extra interest. However, it may be that accelerating your mortgage repayment is financially more beneficial. What’s up with that?
You will be faced with interest on both your mortgage and when you save. Your mortgage costs you interest, while saving on your savings account earns you interest. There is an important difference. On average, you pay a higher percentage of interest on your mortgage than you receive on a savings account. In that case, it may be more beneficial not to save, but to repay. If you pay off your mortgage, the residual debt will further decrease and the amount you pay in interest will also decrease.
Saving versus accelerated mortgage repayment
Indeed, if you pay off your mortgage at an accelerated rate, you are not saving any money. Not soon, anyway. But it is more lucrative in the long run. If the term of the mortgage can be shortened by ten years (or more), you will have to pay ten years less interest! Assuming a mortgage of at least 150,000, that interest can easily be 7,500 per year (if we calculate an average interest of 5.5%). In ten years this benefit could increase to 75,000. When you have paid off the mortgage and no longer have to pay interest, that money goes to you, instead of to the bank.
Want to pay off your mortgage faster or save? What’s the difference? In this summary we may make it a little clearer:
- if you save you receive about 4% interest on the savings;
- if you have a mortgage you pay about 5.5% per year on the full mortgage amount;
- if the entire mortgage amount decreases, you pay less interest (although the percentage remains the same);
- If you keep this up for a number of years, your mortgage will be paid off sooner and you will have a lot of money left over every month.
Save or pay off your mortgage faster. For many people, it is self-evident that they put their savings aside. And of course it is recommended to have money set aside for emergencies. But it can also be worthwhile to pay down your mortgage instead of saving money. This way you can increasingly reduce your monthly costs and have more money left over. This allows you to repay even more, or ultimately save much more.