Wondering if you can pay a mortgage off early? And if it is even worth doing?! You’re in the right place.
If you’ve been saving up or have just received a huge bonus at work, perhaps paying your mortgage off early has crossed your mind. There are pros and cons to doing this, so it’s important to think through them carefully before you decide to repay your mortgage early.
Related: Learn more about a first time buyers mortgage if you are considering buying your first home.
Should I pay off my mortgage early?
One major advantage of paying off your mortgage before the loan term is up is becoming debt-free sooner rather than later, particularly if your mortgage is your only real debt. However, there may be costs involved with an early mortgage repayment, so it’s best to talk to your mortgage adviser to ensure you can afford it. If so, you can enjoy a few hundred pounds extra in your bank every month!
Repaying your mortgage early also reduces the total loan cost. Your payment agreement includes a large amount of interest, but if you pay back the mortgage early you will not need to pay any interest on the remaining months if you had kept to the original repayment plan. This could save you THOUSANDS of pounds!
For example, if you had a £100,000 mortgage at 5% with 20 years remaining, paying off a £5,000 lump sum would save you nearly £8000 in interest and reduce the mortgage length by just over a year and a half. In addition, you’d save all the money you would have spent making mortgage payments for the final year and half – in this example, that would equate to a further £12,500 in savings. That’s over £20,000 saved for a single £5000 overpayment!
Disadvantages of paying off your mortgage early
While early mortgage repayment has its pros, there are also some cons to factor into your decision.
Firstly, you may encounter early repayment fees. Weigh up whether paying the fee will save you interest costs in the long term, or if it’s best to hold off until the charges no longer apply,
Secondly, paying off your mortgage early converts your savings or income into equity – you’ve effectively turned your cash into bricks and mortar. Whilst this will make your mortgage cheaper and shorter, it does mean you no longer have access to the money. If your situation changes, getting it back out of your property takes time and costs money.
Another disadvantage is that repaying your mortgage early may mean you can’t afford to pay off other debts first. Mortgages have lower interest rates than credit cards or car finance, so you should take into account what will cost you more overall and prioritise them first.
Similarly, paying off your mortgage early may not be a good idea if the interest rates on savings are higher than what you pay for your mortgage. In most cases, this won’t be true as the interest rates that banks charge for credit are almost always much higher than the rates they offer on savings accounts.
How to pay off your mortgage early
There are multiple ways to pay off your mortgage early, from paying a lump sum through to switching to an offset mortgage. Here are 4 ways to begin repaying your mortgage early:
1. Pay a lump sum
You can consider paying off your mortgage all at once if you have enough money saved to repay the full mortgage and any fees for early repayment. Alternatively, you may be able to pay off smaller lump sums, which will still reduce the term and total interest payable. Most mortgages will allow you to do this up to 10% of the outstanding balance without paying fees – always check with your broker or lender before making any decisions.
2. Increase your monthly payments
Reducing your payment term through larger monthly payments will save you money in interest in the long term. Your loan agreement should tell you if you can make an overpayment, or if you need to negotiate with your lender to increase the amount.
3. Remortgage
If you have already paid off part of your mortgage, and have finished the fixed term period, you may be able to find a new and better deal through remortgaging. During the remortgage process you can also pay off some of the mortgage or shorten the term. However, this may incur costs such as arrangement fees, so it’s worth getting some financial advice first.
4. Change to an offset mortgage
An offset mortgage links a savings bank account to the mortgage. As money goes into your savings account, it is used to offset the cost of your mortgage, saves interest, and allows you to pay off your mortgage sooner. It also means you still have access to the savings, so if your situation changes, you can withdraw them whenever you need to. It can also help you get out of any early repayment fees!
After weighing up all the advantages and disadvantages of paying off your mortgage early, if you decide to go through with an overpayment it is important to time it right. If your mortgage interest is calculated annually, you should time your overpayment to count towards the annual interest calculation. Whereas if your interest is charged on a daily basis, it’s best to make an overpayment as soon as you can. The vast majority of UK mortgages are now on daily interest calculation but check with your lender before you make any payments.
If you need help figuring out what will work best for you and your current financial situation, don’t hesitate to get in touch – we’ll happily chat through your options and find a solution for you.
