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Should you pay off your mortgage?

Repaying your mortgage early can save you a huge amount of money in interest charges and give you the peace of mind that comes with owning your home outright. But is paying your mortgage off early always a good idea? In this article we’ll look at how you can repay your mortgage before the end date, whether or not this will benefit you in the long run, and how to decide whether it’s the best option for you.
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Why should you pay off your mortgage?

The main reason to repay your mortgage early is to save money on interest. As a general rule, mortgage interest rates tend to be higher than savings interest rates. Often your money would therefore be put to better use avoiding mortgage interest rather than gaining savings interest. Depending on how early you are able to repay your mortgage, you could save thousands of pounds, so it’s certainly something to consider if you’re in a position to do so. 

You'll also have the achievement of having fully paid for and become the owner of your own home, which should never be underestimated. This provides a huge amount of security for your future, and potentially reduce your need to bring in a substantial income. Extra funds and a better work/life balance are often reward enough. It also means that you can do whatever you like with your home, such as renting it out or passing it on to family.

If you suddenly find yourself in a better financial situation, for example, you receive a promotion, an inheritance, or your savings reach a substantial level, then repaying your mortgage could be a great use of your money. However, make sure that this is the absolute best use of these funds before you commit, as there is no getting the money back again!

If you’re paying off other debts with a higher interest rate, then you may be better to prioritise their repayment, even if the balance on them is much lower. It’s also worth considering whether repaying your mortgage now will leave you in the best financial position later in life. Would some or all of the money be better tucked away in a pension fund, for example?

How to pay off your mortgage?

Depending on your circumstances, you may be able to repay your mortgage off entirely, however, most people aim to repay more quickly, by paying more than the minimum repayments over a longer period. This can be done in any of the following ways:

Increasing your monthly repayments

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. Remember, unless you have a flexible mortgage, overpayments cannot be clawed back later – and there’s no point sacrificing savings to overpay on your mortgage if you'll need to rely on more expensive loans later to cover any unexpected bills.

Paying a lump sum

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.

Reducing your mortgage term

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.

Switch to an offset mortgage

An offset mortgage works by linking a savings account to your mortgage. Your savings balance is then deducted from the save mortgage balance before the interest is calculated, so you are charged interest on a lower figure. With an offset mortgage, you could also use your savings to overpay your mortgage and repay it early once you have reduced the balance.

Before you make that decision, though, be sure to shop around for remortgage deals, check whether you could get a better rate with a savings account or pension, or simply choose to pay off your other, more expensive debts.

How much can I save by paying off my mortgage early?

How much you can save depends on your method of overpayment, the amount you overpay and the terms of your mortgage. Generally if your mortgage interest rate is greater than the interest rate on your savings, you will have a greater benefit if you repay your mortgage early, rather than saving any expendable income. 

However,  make sure you look at any early repayment charges (ERCs) and calculate whether it is still worth it. Below are some examples based on different overpayments that you might make towards repaying your mortgage early:

Remaining mortgage debt £150,000

25 year term

Interest rate of 5% 

£100 per month overpayment: would save you £23,200 in interest and you would repay in just over 20 years 

£10,000 lump sum repayment: would save you £22,185 in interest and you would repay in 22 years instead

£20,000 lump sum repayment with repayment penalty on overpayments over 10%:  £5000 of your £20,000 overpayment would be lost in fees

Things to consider when paying off your mortgage early

If your current mortgage provider is making it difficult to pay off your mortgage early, consider remortgaging onto a more flexible deal. If you switch mortgages to a new provider, you can often get a better interest rate and may able to reduce your mortgage term.

Unless you are already on the lender’s SVR (standard variable rate) of interest, it’s likely that you will have to pay an early repayment fee to leave your current mortgage. Make sure you would still be making a saving and achieving your repayment goals once you have deducted this cost from the overall savings. 

You can secure a new remortgage deal up to six months before your existing fixed-rate or introductory period ends, so take advantage of that period to make the most of the deals out there. 

Another thing to bear in mind is the optimum time to make overpayments or fully repay your mortgage balance. As well as repaying when you have the flexibility of a mortgage without penalties for overpayment, it’s a good idea to repay as much as possible when interest rates are low.

This serves two purposes, as it will make the best use of your money in terms of how much you can save, but also puts you in a better position if your mortgage interest rates rise in the future. 

It’s also important to consider your future lifestyle, as repaying your mortgage is a very permanent use of your money compared to having it sit in savings for ‘just in case’ scenarios, such as large bills or job loss.

What are the disadvantages of paying off your mortgage?

  • Some smaller debts could be at a higher level of interest, meaning money used to repay your mortgage could have been better placed repaying those debts

  • Most mortgage products charge an early repayment charge if you make overpayments beyond a specific amount (typically 10%)

  • In some cases it may be possible to earn more interest on your savings than you would save by repaying your mortgage early

  • Devoting all of your funds to your mortgage will reduce the money it’s possible to put aside for retirement or an emergency fund

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