Need advice: Pay extra on mortgage or save for next house?

General
1

Now that I’ve finished paying off my student loan, my husband and I have $1,100 extra each month. We’re not sure what to do with it, so I’m looking for advice here.

We own our current house (1 bedroom) but still owe $440k at a 6.84% interest rate, which we’ll need to re-fix in May. We plan to move in a year or two to start a family, but we’ll need to sell this house to fund the next one. We expect to get only 25% from the sale as a deposit, so we need to save more.

We’re already saving about $3,000 each month for our next deposit. Should we use the extra $1,100 to pay more toward the mortgage or invest it? Our investment fund has been returning about 10% annually, which is higher than the mortgage rate. Yes, I know there’s risk in investing short-term, but we’re okay with that for now.

What do you all think? Any advice would help!

2

If you want a guaranteed return, pay extra on the mortgage. It saves you the 6.84% interest. Investing might give you more, but it’s riskier. Paying off debt is safer.

3

Harley said:
If you want a guaranteed return, pay extra on the mortgage. It saves you the 6.84% interest. Investing might give you more, but it’s riskier. Paying off debt is safer.

How can you say it’s a 6.84% return without knowing the future rates?

4

@Paxton
They said in the post that the interest rate is 6.84%. Every extra payment saves that amount in interest.

5

Harley said:
@Paxton
They said in the post that the interest rate is 6.84%. Every extra payment saves that amount in interest.

It’s actually more since the savings on interest aren’t taxed, unlike investment earnings.

6

Put it toward the mortgage. Even if you sell, you’ll still get the money back, plus the guaranteed interest savings.

7

Extra payments on the mortgage are always a good idea. You’ll save on interest and have more equity for your next home.

8

Reilly said:
Extra payments on the mortgage are always a good idea. You’ll save on interest and have more equity for your next home.

What if house prices drop, and we don’t get the money back?

9

@River
Even if prices drop, you still owe the same mortgage. Paying it down just reduces how much you owe, which is always good.

10

Reilly said:
@River
Even if prices drop, you still owe the same mortgage. Paying it down just reduces how much you owe, which is always good.

That makes sense, thank you!

11

Reilly said:
@River
Even if prices drop, you still owe the same mortgage. Paying it down just reduces how much you owe, which is always good.

Exactly. If prices drop, the bank doesn’t lower your mortgage. You’ll owe less if you pay it down.

12

@River
What if the stock market drops too? Paying off the mortgage is a safer bet.

13

If you pay $1,100 extra each month, that’s $13,200 in a year and $26,400 in two years. All that goes straight to the principal.

14

Put the money on the mortgage.

15

Investing short-term can be risky if you need the money in 1-2 years. It’s better to play it safe.

16

Congrats on paying off your student loans!

17

Have you thought about the taxes on investments? With the mortgage interest so high, it’s better to pay it off. Maybe set up an offset account so you can access the money if needed.

18

When you pay extra, you save on future interest, not lose money. Whether you invest depends on if you think your returns will beat the interest savings. Remember, you pay taxes on investment gains, but not on interest saved.

19

You might want to look into ‘debt recycling.’ It’s not for everyone, but it could help if you’re comfortable with risk. Paying down the mortgage builds equity for your next home.

20

Use an offset or revolving credit account to pay extra but still have access to the money if needed. If the market drops, you’ll owe less. Paying off debt is a sure way to save money.