Tim Leonard
Paying off your mortgage early is most homeowners’ dream. Clear your mortgage debt entirely and that chunk of money which automatically exits your bank account each month will suddenly be yours to do with as you wish. Perhaps most importantly, you’re likely to save on the total amount you pay in mortgage interest too, something that’s true even if you’re only paying off a little more than usual, and not all of your mortgage at once.
Should you overpay on your mortgage you’ll increase the amount of equity you have in your property as well, potentially opening up a route to lower loan to value – and therefore hopefully cheaper – deals, when you compare mortgage rates in the future.
When should you pay off your mortgage early?
Despite the benefits of paying off a mortgage early, it still won’t necessarily be the best option for everyone.
Assess your financial priorities
In particular, if you have credit card debt or unsecured loans where interest rates are higher than your mortgage rate, it’s usually best to prioritise paying these off ahead of paying down your mortgage. Making sure you have adequate savings set aside in case of emergencies could also be argued to come before overpaying on your mortgage. And if you don’t have a pension, starting to save for your retirement might be a good idea too.
Even when these bases are covered, from a purely financial perspective, putting your money into a savings account offering a higher rate of interest than you’re paying on your mortgage could be the better choice – though you’ll need to think about any tax you might pay on your savings interest too.
» MORE: How to find the best savings accounts
Early repayment charges
Whether your mortgage has an early repayment charge (ERC) is another crucial factor when weighing up whether to pay off a mortgage early. The charge is usually a percentage of your remaining mortgage amount, and often stops being applicable once the introductory period on your mortgage ends.
If an ERC is triggered, it can easily run into several thousands of pounds – for instance, an ERC of just 2% on a two-year fixed-rate mortgage for £200,000 means paying an extra £4,000 for the privilege of settling your mortgage within those two years. The longer the fix, the higher the ERC you can usually expect to pay. An ERC will also need to be paid if you remortgage to a new mortgage provider during an introductory period.
How to pay off your mortgage early
If you think paying off your mortgage early is right for you, there are different ways this can be achieved. Here are six methods that you could consider:
1. Overpay your mortgage payments
When making monthly mortgage payments, it’s usually possible to overpay, and pay more than your usual amount. The extra money reduces the capital debt of your mortgage loan, and as interest is calculated on your outstanding balance, you’ll pay less interest and clear your mortgage quicker. Use our mortgage overpayment calculator to work out how paying more can reduce the amount of interest you pay and the time it will take to clear your mortgage.
However, most lenders will cap how much extra you can pay into a mortgage – typically the most you can overpay is 10% of your outstanding mortgage balance each year. Exceed this and you’re likely to face charges that could negate the financial benefit you’re gaining by overpaying. For this reason, you should always check your mortgage paperwork, or speak with your mortgage lender, to make sure of any limits.
Also, make it clear to your mortgage lender that you’re making the overpayments with the aim of shortening your mortgage term; if you don’t, they may assume you’re simply making your usual payment early, and might adjust your future monthly payment to reflect this. If this happens, you may save a little on interest, but ultimately won’t pay your mortgage off much earlier than your original date.
If you’re taking out a new mortgage, and the ability to overpay is important to you, always check the rules before signing up.
» MORE: Is overpaying your mortgage worth it?
2. Pay a lump sum into your mortgage
If you have a large sum of money, perhaps from a tax refund, work bonus or other windfall, putting this into your mortgage in one go can speed up your progress towards becoming mortgage-free.
You’ll get the most benefit from a lump sum payment if your mortgage interest is calculated daily. This is because your outstanding balance will decrease almost immediately on receipt of the lump sum, leading to a similarly quick reduction in the amount of interest you pay.
However, the limits and potential charges surrounding overpayments apply to lump sums as well as monthly payments. If a lump sum accounts for your 10% overpayment allowance, paying extra on your regular payments in the same period could push you over any limit and result in charges. Depending on fees and where you are in your mortgage deal, it may be wise to keep the lump sum safe until it’s time for a new mortgage deal and add the funds at this point to avoid charges.
3. Act before you’re moved to the SVR
If you have a fixed, tracker or discount mortgage, and fail to remortgage before your introductory period expires, you’ll automatically be moved onto your lender’s standard variable rate (SVR). Generally, SVRs are much higher than the initial introductory deal, so your repayments are likely to rise too.
To avoid this, make a note of when your existing mortgage deal ends, and start looking for new mortgages around six months before it’s due to expire. Your existing lender may have a suitable deal or you may find the best mortgage for you is being offered by an alternative lender.
When remortgaging, always take into account the fees that must be paid along with the mortgage rate to make sure you’re getting a better deal all round. Use a professionally qualified mortgage adviser if you want help evaluating your options.
4. Remortgage to a shorter term
If you currently have a 20-year mortgage term, remortgaging to a 10-year term will obviously expedite your payoff. Unless you switch to a much lower interest rate, the shorter timeframe will see your monthly repayments increase and your lender will need to make sure the new payments are affordable. However, the shorter term pain of higher monthly repayments will result in a longer term saving in terms of the lower total interest that you will be paying back.
5. Consider an offset mortgage
An offset mortgage is another remortgage option worth considering if you have savings. Here a lender will offset your savings against your outstanding mortgage loan to reduce the size of the balance you pay interest on.
So if you have a mortgage of £200,000 and £10,000 in savings that you can offset against it, you’ll only pay interest on the lower mortgage balance of £190,000. Paying less interest should provide the opportunity to clear your mortgage faster, but check the big picture. Set up fees and potentially higher interest rates may take away some of the benefits.
6. Avoid adding mortgage fees to your loan
If you have the means to do so, paying mortgage fees upfront, rather than adding them to your mortgage loan is generally a good idea. This is because when you add the fees to your mortgage, your loan size is getting bigger, as is the interest you’ll have to pay. Avoid this, and your chances of paying off your mortgage early should improve too.
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