5 points to consider before rushing to clear a home finance

#ConsumerEducation

Halima and Nasser recently received a bonus from their family business. As a newly married couple, they are keen to align their finances and take decisions that help them grow their wealth. They already own a home with the help of a 15-year home finance. They are evaluating whether they want to use the bonus to repay the home finance and be debt-free, or if they would be better off investing the money.

Research shows that almost a third of those who held home finance did not believe they would pay it off before they turned 65. One in 10 people still had debt when they retired. But are you better off by paying off the home finance quickly?

1. Compare the benefit: For Halima and Nasser, the profit rate on their home finance is 3.99%. Are you going to lose potentially high-return investments if you use the bonus money to pay off the home finance?

If you are locked in at a low rate for the medium-term, consider holding on to the home finance and investing elsewhere.

2. Do you have emergency funds? Will paying off the home finance make you house-rich but cash-poor? Sure, you will come home to a house that you own outright, without any debt – but will it mean stress ahead if you are not sure of how you will pay for any sudden requirements?

Ensure that you have emergency funds in place for surviving about 4 to 6 months without any income before rushing to clear your home finance.

3. Peace of mind: Depending on what stage of life you are at, the inclination to be debt-free varies. If you are planning to opt for higher studies, or quit a job and start a family, or reduce your workflow to semi-retired, the psychological uplift from not having a debt burden can be tremendous.

If being debt-free will free up your mind to try other things, consider paying off your home finance to realize the benefits.

4. Other debts: If your home finance is under 4% and not likely to change for a few years, while you are still paying off card debt with higher profit rates, it’s better to pay those off first. Because it’s tied to a tangible asset, home finance tends to be offered at lower profit rates than, say, personal finance.

Clear your most expensive debts first. The more expensive the debt in terms of profit rate, the greater the benefit you will get from paying it off quickly.

5. Your financial personality: Some people view home finance as a form of compulsory saving. If you rush to pay your home finance, and you are not a habitual saver, you won’t save anything even after paying off the house.

Make sure your financial decisions reflect your personality. If you are likely to spend all your savings realized after paying off the finance early, you might be better off making monthly payments.

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