When repaying your mortgage, you might be tempted to pay back more each month to finish paying it off earlier. But is that always a good thing?
We explain what your options are if you want to pay off your mortgage early, and what the alternatives are if the repayment penalty is just too costly.
Paying off your mortgage is a huge accomplishment – it is one of the largest debts we are ever likely to take on and it can often take anywhere between 25 and 40 years to pay off.
Many people look for ways to pay off their mortgage early. You can do this by increasing the amount of money you repay each month or by making a large one off payment.
You could also request that your mortgage provider shortens the term of the mortgage, or get a remortgage deal that might offer you a better deal with a shorter term, or even take out an offset mortgage and choose to repay your mortgage earlier or have lower mortgage payments.
There are many options available, but it is best to do your research and pick the one that is most suitable for you and your financial circumstances.
Repay your mortgage early: mortgage overpayments
You might have recently been given a pay rise at work, or come into extra cash, and feel like it might be a good time to put some of that extra income towards repaying your mortgage faster. If you have a lump sum of cash you could put all of it down to make one large mortgage repayment or spread it out to increase what you currently pay each month.
Either way, the savings in interest could be huge and are likely to shave months, and possibly years off your mortgage repayment term.
Before you do this, it’s important to check the terms of your mortgage deal to ensure you won’t be hit with a penalty fee for repaying your mortgage early.
Many mortgage providers will allow you to overpay by up to 10% per year without incurring a penalty. You will need to check if any such concessions are valid over any 12-month period or simply begin on 1 January of that year.
How much can I save with mortgage overpayments?
If you had a remaining mortgage debt of £150,000 to be paid over 25 years at an interest rate of 5% and you decided you wanted to overpay by an extra £100 each month, you could save a total of £23,200 in interest alone. It would also mean you would have paid off the entire mortgage in just over 20 years instead of 25.
And using the same example above, but instead paying a lump sum of £10,000 up front, could still save you £22,185 in interest alone, and mean you will finish paying off your mortgage in full in 22 years instead of 25. But remember, if you pay a lump sum, make sure it does not go over the concession limit for overpaying.
For example, if you still had a mortgage of £150,000 remaining, and wanted to pay £20,000 in one go, but the bank had a repayment penalty on any payments over 10% (meaning anything over £15,000 in this example), you would be required to pay a fee on the extra £5,000.
Check what this fee might be, and calculate whether it will still be worth it. But if you time it correctly and do your calculations in advance you can continue to overpay without incurring any early repayment penalties.
But is it always better to repay your mortgage early? Presuming you have the extra cash to overpay your mortgage each month, could your money be better spent elsewhere?
Should I pay off my mortgage early?
Although a mortgage is one of the biggest debts you’re ever likely to have, technically speaking, it isn’t always the most expensive. Credit cards, personal loans and especially store cards, often have a higher rate of interest on them, so if you have been unfortunate enough to accrue large debts with those types of credit, it’s likely you’ll be paying, relatively speaking, much more in interest.
If you have extra income or a lump sum of cash to use to lower your mortgage debts, it might be better to put that towards your more expensive debt first.
If your debts are generally under control, paying off your mortgage early makes a lot of sense, but there are other useful ways to make your money go further. For example, investing it into a pension scheme or a high rate savings account could give you a greater return when you decide to retire.
By then your mortgage may have already been paid off too, so you’ll have more money to enjoy your retirement with.
On the subject of the future, which is uncertain, you may wish to protect your family and those who depend on you financially by investing in life insurance. Even if you decide to start making mortgage overpayments, is there a financial back up in place should the worst happen to you?
Make sure to weigh up all your options first before deciding whether or not to pay off your mortgage early.
How to pay off your mortgage early
Aside from making overpayments on your existing mortgage, there are other ways to help you pay off your mortgage early.
Shorten your mortgage term
Ask your existing mortgage provider what they might charge you if you were to shorten the mortgage term by a few years. Naturally, your monthly mortgage repayments would increase, but it could sometimes work out cheaper than paying the early repayment penalty.
Remortgage for a cheaper, shorter deal
If your current mortgage provider is making it expensive or difficult to pay off your mortgage early, then consider getting a remortgage deal. By switching to a new mortgage provider, you can often get a cheaper mortgage interest rate for up to 5 years of the mortgage term. You may also be able to get a shorter mortgage term.
Just be careful as remortgaging will probably activate the early repayment penalty fee on your current mortgage, and you will probably have to pay a fee to switch mortgage providers. Do the sums before to see if you could save. Remortgage deals generally work out better when you are coming close to the end of your current fixed rate mortgage deal, but it’s always good to shop around well in advance just in case.
Switch to an offset mortgage
An offset mortgage works by linking your savings account to your mortgage. All the money you have saved up will be taken off the mortgage balance. So your interest payments should be lower as you’ll only be charged interest on the mortgage balance minus your savings. With an offset mortgage you could also use your savings to overpay your mortgage and repay it early.
Being able to pay off your mortgage early is a great privilege, but it may not always be the right financial decision for you. Before you make that decision, be sure to shop around for remortgage deals, check if you could get a decent savings account or pension, or simply choose to pay off your other, more expensive debts.
- Remortgaging guide – Our guide to remortgaging can help you decide if switching from your current mortgage deal is right for you
- How to spring-clean your finances – Your personal finances are no different to your home, garden or garage – they need a spring clean from time to time. Find out how switching your bank account, mortgage and credit card could save you a few hundred pounds.