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Which loan should you pay off first?

24 Jan 2014 Nowra 0 Comment

How often do you look at the balance owing on your mortgage and feel instantly deflated? You’re not alone. While it’s always very important to speak to a financial expert about your specific circumstances, we can offer a couple of thoughts that may help.

There are a couple of things to consider when deciding which of your loans to pay off first:

The first concerns the facts and figures of each loan. Typically, a home loan will be the loan you have with the largest balance owing. However, it will also generally be the one with the lowest interest rate. If you want to cut down on the money you’re throwing away on interest, (i.e. the money you’re charged on top of what you are actually borrowing), it makes more sense to pay off those smaller loans with the highest interest rates first.

The second thing to consider is the psychological impact. Paying off multiple loans can negatively affect your mood just as much as your bank balance. By paying off the smaller, high interest loans first, you will feel as though you’re actually getting somewhere. Each time a loan is paid off, you have that extra money sitting in your account, and you can mentally check it off your list of financial burdens.

Finally, it pays to be aware of the tax deductions available when paying off a mortgage, particularly when it’s an investment property. You may be familiar with the tax benefits you can receive when owning a negatively geared investment property, but there are also depreciation benefits too. It seems there really is good debt and bad debt… who would have thought?!

Of course it would be wonderful to own your slice of real estate outright, but if you’re struggling to make your monthly pay stretch across all of your multiple debts and payment plans, now might not be the best time to focus on it. If you’re in a bit of a financial mess, we encourage you to speak to an expert who can help you to understand how to make your money work best for you.

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