In most cases you can repay your mortgage early. This can save you a huge amount of interest, and you can enjoy longer with the peace of mind that comes with having no mortgage hanging around your neck. But is paying a mortgage off in full early always a good thing? We explain what your options are, and the benefits if you want to clear your mortgage ahead of time. We also explain what the alternatives are if the repayment penalty is just too costly.
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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.
Many people look for ways to pay off their mortgage early. There are a number of possible ways you can do this:
Increasing your monthly repayments
Making a large one-off payment
Remortgaging onto a shorter mortgage term
Switching to an offset mortgage
To find out which option is best for you and your financial circumstances, you should do your research.
During the course of a standard repayment mortgage, you will pay off the capital amount - which is the amount you've borrowed 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 by, 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 extra cash, you might 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.
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 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 in January of that year.
How much you can save will depend on your method of overpayment, the amount you overpay by, 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 will 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 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. 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 pay off your mortgage early? Presuming you have the extra cash to overpay your mortgage each month, could your money be better spent elsewhere? Should you pay off a mortgage or save?
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 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. Keep in mind both the advantages and disadvantages of paying off your mortgage early:
Overpaying your mortgage can take years off your mortgage, allowing you to be mortgage free as soon as possible.
When you overpay, you no longer pay interest on the amount that you overpay which can reduce your monthly payments.
At times when interest rates are low, the returns on overpaying your mortgage are often higher than putting the money in a savings account.
If you have credit cards or loans, it’s likely that the interest rate will be far higher than your mortgage interest rate. Overpaying on your mortgage can leave you with less money available to direct towards repayments on the more expensive debt.
Certain mortgage products will charge an early repayment charge if you make overpayments beyond a specific amount. To avoid penalty fees, check the terms of your mortgage deal before you make an overpayment.
Historically, leaving a small amount of money outstanding on a mortgage meant that the lender kept the deeds for the property in safe keeping 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 means that any new line of credit will require a separate application with new credit checks, regardless of the lender.
Aside 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 you 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 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.
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.
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