Paying off your mortgage in full 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.
There are a number of possible ways you can repay a mortgage early, including the following:
Increasing your monthly repayments
Making a large one-off payment
Remortgaging to a shorter mortgage term
Switching to an offset mortgage
During the course of a standard repayment mortgage, you pay off the capital amount – which is the amount you borrow from the bank – as well as interest.
By paying off your mortgage early, you could save hundreds, if not thousands, of pounds in interest. Depending on how much you overpay, you could shave months or possibly years off your mortgage repayment term.
If you’ve recently been given a pay rise at work, or come into some extra cash, such as from an inheritance, it might be a good time to put some of that extra money 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.
However, 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 paying off your mortgage early.
Many mortgage providers allow you to overpay by up to 10% of the remaining balance a year without incurring a penalty. The year may apply to the previous 12 months, or from January to January, depending on your mortgage provider.
How much you can save depends on your method of overpayment, the amount you overpay and the terms of your mortgage.
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.
Paying a lump sum of £10,000 up front instead could still save you £22,185 in interest alone, and mean you finish paying off your mortgage in 22 years instead of 25. But if you pay a lump sum, make sure it does not go over the penalty 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 is still worth it. If you time it correctly and do your calculations in advance, you can continue to overpay without incurring any early repayment penalties.
Although a mortgage is one of the biggest debts you’re ever likely to have, it isn’t always the most expensive. Credit cards, personal loans and store cards in particular often have a higher rate of interest, so if you have debts with those types of credit, it’s likely you’re paying 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 in 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 with which to enjoy your retirement.
On the subject of the future, you may wish to protect your family and those who depend on you financially by increasing your life insurance cover. Even if you decide to start making mortgage overpayments, this type of protection can act as a financial backup if you were to die.
Remember, unless you have a flexible mortgage, overpayments now cannot be clawed back later – and there’s no point sacrificing savings to overpay on your mortgage if all it means is you need to rely on more expensive loans later to cover an unexpected bill.
Be sure to weigh up all your options first before deciding whether or not to pay off your mortgage early and keep in mind both the advantages and disadvantages of doing so.
Overpaying your mortgage can take years off your mortgage, enabling you to be mortgage-free sooner
When you overpay, you no longer pay interest on the amount you overpay, which can reduce your monthly payments
When interest rates are low, the returns on overpaying your mortgage are often higher than putting the money in a savings account
Overpaying on your mortgage can leave you with less money available to direct towards repayments on more expensive debt
Certain mortgage products charge an early repayment charge if you make overpayments beyond a specific amount
Historically, leaving a small amount of money outstanding on a mortgage meant that the lender kept the deeds for the property somewhere secure, but nowadays, deeds for the majority of properties are no longer required in paper format – records are now held electronically by the Land Registry.
On top of this, leaving a nominal amount on a mortgage in the past made it easier to borrow from an existing lender. However, the impact of the recession and the tightening of affordability criteria mean that any new line of credit requires a separate application with new credit checks, regardless of the lender.
Apart from making overpayments on your existing mortgage, there are other ways to help you pay off your mortgage early.
Ask your existing mortgage provider what they might charge if you were to shorten the mortgage term by a few years. Your monthly mortgage repayments would increase, but it could sometimes work out cheaper than paying the early repayment penalty.
If your current mortgage provider is making it expensive or difficult to pay off your mortgage early, consider getting a remortgage deal. By switching to a new mortgage provider, you can often get a cheaper mortgage interest rate for up to five years of the mortgage term. You may also be able to get a shorter mortgage term.
Just be careful, because 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 beforehand to see whether you could save. Remortgage deals generally work out better when you are close to the end of your current fixed-rate mortgage deal, but it’s always a good idea to shop around well in advance just in case.
An offset mortgage works by linking your savings account to your mortgage. All the money you save is taken off the mortgage balance. So, your interest payments should be lower as you’re only being 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.
Before you make that decision, though, be sure to shop around for remortgage deals, check whether you could get a decent savings account or pension, or simply choose to pay off your other, more expensive debts.