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Should we pay off our mortgage or keep it for a line of credit?

Should we pay off our mortgage or keep it for a line of credit?

Penny Wise – May 2, 2024

Dear Ms. Wise, my wife and I have $25,000 remaining on our mortgage and are on track to pay it off pretty easily this year. I’m ready to pop the champagne, but my wife thinks we should keep the mortgage open so that we can draw on it as a line of credit. What’s best?

The wisdom: Keeping your mortgage open to use as a line of credit can offer valuable financial flexibility because you will be able to borrow at lower interest rates than a personal loan or credit card, says Theo Chambers, the chief executive of Shore Financial in Sydney.

“This means you can have the funds available for emergencies, unexpected expenses or investment opportunities,” he says.

A line of credit can serve as a financial lifeline, but it’s important to recognise when it’s time to let go.  Michaela Pollock

“Another critical aspect to consider is the paperwork and effort involved in obtaining a new loan if you decide to pay off your current mortgage and later need access to funds.

“Reestablishing a mortgage can be time-consuming and may involve application fees, valuation costs, and potentially higher interest rates if market conditions change.”

Reestablishing a mortgage can be challenging if your income has decreased or if you are approaching retirement age, Chambers adds.

Daniel Wessels, the chief executive of Australian digital lender Jacaranda Finance, says having access to a line of credit tied to the equity of your home gives you the ability to borrow and repay funds on your own terms without the restrictions that come with traditional borrowing.

“Your investment strategy can also come into play, as a line of credit can potentially support such moves as covering the deposit on an investment property you may buy in the future,” he says.

But there are potential cons, Wessels adds, including the potential to get into the habit of using the line of credit a little too freely, undermining the hard work you’re already done paying down the bulk of the mortgage.

“That may not apply if you and your wife have strong financial discipline, but available funds can serve as a temptation.”

Bruce Debenham, a director with Adelaide accounting and financial advice business Perks, says if your mortgage includes a redraw facility it can act in the same way as a line of credit. But if you do not have an immediate need to borrow money, then it might be more cost-effective to reapply for a new loan should the need arise.

Some mortgages offering line-of-credit features can have higher fees or different terms and conditions, which might erode the benefits of keeping the mortgage open.

“Be careful to evaluate any ongoing monthly or annual fees associated with the facility,” Debenham says.

“You might also want to reflect on how an open mortgage may complicate estate matters if not settled by the time of your passing.

“A line of credit can serve as a financial lifeline or hidden anchor – the wisdom lies in knowing when to hold on and when to let go.”

Lastly, it might be wise to consider building up a $25,000 cash buffer to serve as a safety net, Wessels says.

“A safety net amounting to about six months of living expenses can provide considerable financial security without the need to rely on credit,” he says.

“Then, once this buffer is established, it might be prudent to close the mortgage. This safety net then essentially acts as your line of credit, offering a reserve of funds you can draw on without accruing interest.”

The wisdom: Keeping your mortgage open to use as a line of credit can offer valuable financial flexibility because you will be able to borrow at lower interest rates than a personal loan or credit card, says Theo Chambers, the chief executive of Shore Financial in Sydney.

“This means you can have the funds available for emergencies, unexpected expenses or investment opportunities,” he says.

A line of credit can serve as a financial lifeline, but it’s important to recognise when it’s time to let go.
“Another critical aspect to consider is the paperwork and effort involved in obtaining a new loan if you decide to pay off your current mortgage and later need access to funds.

“Reestablishing a mortgage can be time-consuming and may involve application fees, valuation costs, and potentially higher interest rates if market conditions change.”

Reestablishing a mortgage can be challenging if your income has decreased or if you are approaching retirement age, Chambers adds.

Daniel Wessels, the chief executive of Australian digital lender Jacaranda Finance, says having access to a line of credit tied to the equity of your home gives you the ability to borrow and repay funds on your own terms without the restrictions that come with traditional borrowing.

“Your investment strategy can also come into play, as a line of credit can potentially support such moves as covering the deposit on an investment property you may buy in the future,” he says.

But there are potential cons, Wessels adds, including the potential to get into the habit of using the line of credit a little too freely, undermining the hard work you’re already done paying down the bulk of the mortgage.

Should we pay off our mortgage or keep it for a line of credit?

“That may not apply if you and your wife have strong financial discipline, but available funds can serve as a temptation.”

Bruce Debenham, a director with Adelaide accounting and financial advice business Perks, says if your mortgage includes a redraw facility it can act in the same way as a line of credit. But if you do not have an immediate need to borrow money, then it might be more cost-effective to reapply for a new loan should the need arise.

Some mortgages offering line-of-credit features can have higher fees or different terms and conditions, which might erode the benefits of keeping the mortgage open.

“Be careful to evaluate any ongoing monthly or annual fees associated with the facility,” Debenham says.

“You might also want to reflect on how an open mortgage may complicate estate matters if not settled by the time of your passing.

“A line of credit can serve as a financial lifeline or hidden anchor – the wisdom lies in knowing when to hold on and when to let go.”

Should we pay off our mortgage or keep it for a line of credit?

Lastly, it might be wise to consider building up a $25,000 cash buffer to serve as a safety net, Wessels says.

“A safety net amounting to about six months of living expenses can provide considerable financial security without the need to rely on credit,” he says.

“Then, once this buffer is established, it might be prudent to close the mortgage. This safety net then essentially acts as your line of credit, offering a reserve of funds you can draw on without accruing interest.”

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