Most of us dream about being able to pay off our mortgages faster and getting started on a debt free lifestyle. However, it’s not as easy as it sounds and there are a few things you should bear in mind if you’re considering attempting to pay off your mortgage early.
Why you might want to pay off your mortgage faster
Paying off your mortgage early comes with plenty of benefits. Most importantly, and the most attractive of them being that you can become debt free sooner. Paying off a mortgage early can also save you thousands in interest charges that you would otherwise pay for if you kept your mortgage for the full term. Whilst there are many benefits to paying off a mortgage early and getting out of debt, there are also some things you should be aware of if it’s something you’re considering.
How do I pay off my mortgage faster?
You can pay off your mortgage earlier in a number of ways, which include shortening the term of your mortgage, overpaying on your mortgage, or remortgaging all together and paying fees upfront. Following this advice about paying off your mortgage early can help you become debt free sooner.
• Shortening your mortgage term
By shortening your mortgage term, you are in agreement with your lender to pay your mortgage off early. While shortening your term will cause your monthly payment to rise due to the fact that the years taken off the repayment will be added to what you intend to pay, you will be paying less interest on the loan as a whole. For example, if you have to repay a mortgage of £500,000 on a 25-year fixed mortgage at a rate of 2.5%, your monthly payment would be £2,243. If you made an agreement with your lender to pay your mortgage off in 20 years, however, your monthly payment would rise to £2,650, yet you would save £37,061 in interest payments. So, by paying off your mortgage just five years early, you would save well over five figures on your home. To do this you will need approval from your mortgage lender.
• Overpaying your mortgage
Another option is to overpay on your mortgage. In order to overpay your mortgage, you would be paying more than your monthly payment to pay off your mortgage sooner. Like shortening your mortgage term, overpaying will generally save you thousands in interest payments. However, not all mortgages allow for overpayments. For this reason, it’s important to check with your mortgage lender to see if this is allowed, as sometimes there is a fee attached making it not worth your while.
There are two main ways in which you can overpay on your mortgage. One is with a large lump sum, maybe from an inheritance or financial windfall, and the other is through regular monthly overpayments. Be sure to tell your lender you wish to overpay in order to reduce your debt, otherwise the mortgage will not clear any faster.
You can overpay your mortgage at regular intervals as well by taking note of unnecessary things you are spending your money on. Making a list of your expenses, both necessary and unnecessary can help you see area where you could cut spending and save money. You could then use that extra £100 pounds, or how ever much you save, to put towards overpaying on your mortgage. Even £100 monthly as an overpayment can generally save you thousands on your mortgage as a whole.
You can use our overpayment calculator to see how overpaying will affect your mortgage.
Many people decide to remortgage in order to get a better rate than the standard variable rate (SVR) which most mortgages revert to after an introductory period. An introductory period may be anywhere from two to ten years, and the SVR is almost always fairly high after that.
Remortgaging can help keep a reasonable rate for the remainder of your mortgage. Remortgaging to reduce your SVR is a common practice and often a financially smart decision. You should constantly monitor your property value to make sure that you are getting the best deal on the equity you have built up. Remortgaging when you have a loan to value (LTV) of 75% versus 85% can save you in the thousands. Lenders are likely to offer lower interest rates on loans with a loan to value ratio of under 80%. Remortgaging may not be ideal for everyone though, so it is always a good idea to speak to a mortgage advisor before making the move to remortgage.
An offset mortgage is a type of mortgage you can often get when remortgaging your home. With an offset mortgage, you will use your savings to offset the costs of a new mortgage. In an offset mortgage a percentage of your savings counts towards your overall debt. For example, if you have £20,000 available for repayment in your savings, and the remainder of your loan is for £300,000, then your savings would count towards some of the mortgage repayment. This means you would be paying off £280,000, thereby saving you from paying interest on the other £20,000. Some mortgage lenders are wary to do this, however, and an offset mortgage is typically reserved for those with large savings or who pay a higher tax rate.
Should I remortgage or should I overpay?
Remortgaging all together and switching loans is a better idea than overpaying if your salary or income increases. You may be able to get a better interest rate and thereby can pay your mortgage off sooner.
Perhaps you have come into some extra money and are considering overpaying your mortgage. Overpaying may not be the best option if you have other loans in which the interest rate is higher than your mortgage. Additionally, if you have a pension pot, whether that be a personal pension or a workplace pension, it may be better to put the extra funds into your pension plan since some pensions are growing faster than mortgages. You can also access your pension plan at 55, so it may be worth using the extra funds that way. There is also a tax relief that comes with adding to your pension plan, so this is something to take into account as well.
A financial advisor can help you determine which is the best route to go. Mortgage brokerage services can also help you find ways to pay off your mortgage ahead of time without penalty, like overpayment charges and fees charged by some lenders. Brokers can help you find deals on remortgages that you may not have access to yourself. It is always a good idea to speak with a qualified mortgage specialist in order to make sure that you are working towards paying off your mortgage in the best way possible.
You can use our overpayment calculator to see how overpaying will affect your mortgage.
You can also use our site to compare remortgage deals, using our remortgage comparison service. Using both of these tools may help you have a clearer understanding of which is the best option for you.
• Paying fees upfront
When getting a mortgage there are often fees the lender tacks on that can either be spread out over the term of the loan or paid upfront. You should always pay any fees up front if you can. Even a £999 fee, when spread out over the mortgage, accrues interest which you could be saving on. If you do decide to add the fees to the loan, ask for it to only be spread over a shorter amount of time so that you are done paying on it by the time your fixed-rate or variable-rate mortgage deal ends.
How to fund early mortgage repayment
There are a few ways you can easily make room in your budget to fund paying off your mortgage. Going through your weekly spending and seeing areas where you could save even a little bit of money can help you put money towards paying off your mortgage. Curbing your spending, especially on luxuries like designer clothing and pricy electronics can help you have extra cash on hand to pay off your mortgage ahead of time. By doing this you will have more cashflow for luxuries down the line.
Another way to save up to fund early mortgage repayment is to sell unwanted or unused items on online sites and apps like Facebook Marketplace, Schpock and Ebay. Even a little contribution to paying off your mortgage sooner can save thousands in interest payments. It is always advisable to speak with a qualified financial professional about if paying off your mortgage early is the best option for you.
Pros and cons of paying of your mortgage early
While paying off your mortgage has its advantages in that you can save money on interest and become debt free sooner, there are some things to look out for as well. Most importantly, you should make sure that you do not have other debts that play a priority to paying off your mortgage. Also, if your savings account yields a higher interest than your mortgage, it is usually wiser to put the extra money towards savings. Additionally, it may be a good move to put your savings or extra cash on hand towards a pension pot. After all, we all want to stop working at some point in time! If your pension pot doesn’t have regular contributions from you or an employer, you may want to consider funding that instead. There are also additional tax benefits for paying into a pension plan.
Paying off your mortgage ahead of time can help you save thousands on interest. Many see savings within the five figures just by paying their mortgage off even 5 years early. Whilst paying off a mortgage early is usually a sound financial move, it is important to be aware of whether or not your lender allows this, as if they do not you can often be hit with extra fees just for paying off your mortgage ahead of schedule. Taking all your debts into account and prioritising which ones should be paid off first is a good plan of action. After all, if you owe thousands in credit card debt it is certainly better to get that taken care of first as the interest rates tend to be much higher than that of a mortgage.
A mortgage broker can help you determine which is the best route to go when it comes to paying off your mortgage early. With a keen understanding of the mortgage market they can advise whether switching loans, overpaying, or remortgaging all together is the best plan of action. Mortgage brokers can also help you find better deals than you may find yourself, as many have access to the whole-of-market and mortgage deals which the general public do not.
The bottom line
Living debt free is certainly something many want to do. Paying off your mortgage early by shortening your mortgage, overpaying, remortgaging, paying fees up front and being smart with your money can help you achieve a debt free lifestyle one day. No matter what you decide, or how you wish to go about paying off your mortgage early, speaking to a qualified mortgage professional can help you make sense of the entire process and ensure that you are doing the best thing for yourself financially.