The prospect of fully paying off your mortgage can sometimes feel a lifetime away. And, whilst it’s important to be mindful of the potential pitfalls of early repayment, you could increase equity and save money in interest in the long run.
Should I pay off my mortgage early?
Paying off a mortgage early isn’t necessarily the best option for every homeowner. If you have other long-term financial goals, such as financing an emergency fund or savings account or paying off credit card debt, you may well consider prioritising these over paying down your mortgage.
For many people, the biggest factor in weighing up whether to pay off their mortgage early is if their mortgage has an early repayment charge (ERC). This usually constitutes a percentage of the remaining loan, and will generally stop being applicable once your mortgage’s introductory period has ended.
Let’s say your £200,000 mortgage is fixed for two years and has an ERC of 2%. That would mean you’d need to pay the bank £4,000 if you were to pay off your mortgage early. Longer fixed-rate periods often come with a higher ERC. The ERC will also apply if you remortgage to a different lender during the introductory deal period.
If you think paying off your mortgage is right in your situation, however, there are numerous ways to pay off your mortgage early. Today we examine six of them.
1) Make extra mortgage payments
When you make your monthly repayment, your mortgage provider will generally allow you to make extra repayments. However, quite often they will have caps on how much extra you can pay into your mortgage, so check the details of your mortgage.
The extra money you pay reduces the capital debt of the loan. As interest is calculated on the outstanding balance you will end up paying less interest and clearing the mortgage quicker.
If you take out a new mortgage, and having the ability to repay extra capital is important to you, check the limitations around this before signing up.
2) Put windfalls into your mortgage
Some taxpayers receive an annual refund on their tax. If you put this tax rebate down on your mortgage, you might find you make significant progress in paying off your loan. Other windfalls could include a work bonus or even a cash gift. If you are promoted or given a raise, you might also leverage your newfound extra income to pay off your mortgage.
3) Refinance your mortgage as a shorter-term loan
If you have a 20-year mortgage, refinancing it as a 10-year loan will expedite your payoff, and perhaps lead to you attaining a more favourable interest rate in the process. The lesser timeframe would mean that, whilst your monthly repayments would of course increase, you’d probably also pay less interest as you would be paying for less time. A mortgage calculator can be invaluable in helping you see how much you’d need to pay.
It's useful to remember that if rates changed since you last reviewed your mortgage that changing terms won’t get you a better rate.
4) Consider remortgaging
If you are on a fixed, tracker or discount mortgage, and do not review your mortgage before your introductory deal is over, your provider will move you onto its Standard Variable Rate (SVR). Generally SVR’s are much higher than the initial introductory deal, so your repayments are likely to rise.
Make sure you know when your deal ends, and make a note to look into your options from 6 months before that end. You can either take out a new deal with your existing provider or look at finding an alternative lender who may have some even better deals to consider.
When remortgaging, whilst another offer may look very attractive, if their headline rate is quite low. But remember to make sure you understand all the fee’s. Use a professional qualified mortgage advisor if you feel you need help understanding to navigate this process.
5) Review offset mortgages
You could also consider an offset mortgage, which links your savings account balance to your mortgage balance. Your lender will offset the value of your savings balance against your outstanding loan, with the principle of reducing the size of the balance you pay interest on.
If your mortgage was £200,000 and you had £10,000 savings. Instead of paying interest on a balance of £200,000 you pay it on £190,000. This can provide you with both lower interest paid, and term to clear the mortgage reduced.
6) Upfront payment
Low interest rates on a mortgage frequently come with high fees, which are often tacked on to the mortgage in order to avoid having to pay them upfront. This will increase your intended debt by the value of the fee. The larger the debt, the more interest you pay.
If, however, you are able to pay the fees in a lump sum when your term begins, you will not be increasing your debt, and pay less interest as the balance is kept lower. This supports your prospects of paying off your mortgage early.
Could paying off my mortgage early be right for me?
Paying your mortgage off early can save you a lot of money in interest over the term, but you need to be mindful of the potential pitfalls that can occur if you aren’t aware of your lender’s policies and the pros and cons of the process.
Comparison resources, including mortgage calculators, can help you understand what to consider before remortgaging, and could be just what you need to help you work out whether early repayment of your mortgage is right for you.