Advantages and Disadvantages of Paying Off Your Mortgage Early

All homeowners look forward to the day when they're free from the burden of monthly payments to their mortgage lender, able to use their hard-earned money as they please. However, when faced with a lump sum, the decision to pay off part or all of the mortgage early isn't always so straightforward.

To provide clarity on this matter, we've compiled a list of the pros and cons to paying off your mortgage early. This will help you make a more informed decision on whether it's wise to proceed.

The advantages of early repayment

You’ll pay less interest in the long-term

The primary incentive to pay off your mortgage early lies in the long-term financial benefits it offers. Depending on the specifics of your mortgage, such as its type and size, the monthly interest payments can vary significantly. Although, regardless of whether you're following an interest-only or repayment plan, extending the duration of your mortgage will inevitably result in higher overall interest payments.

Clearing your mortgage even a few years ahead of time has the potential to yield substantial savings in interest costs. For instance, on a £150,000 mortgage at 5% interest with 25 years remaining, making a £5,000 lump sum payment reduces the interest payable by £11,500.

You’ll be debt-free

Although your mortgage might not be your sole financial obligation, it typically represents the largest one for most individuals. And so, liberating yourself from it can greatly enhance your overall financial situation.

Furthermore, the surplus cash you'll gain each month can be redirected towards any other area which could even include enjoyable pursuits, such as travelling or purchasing a new car. It's also worth noting that, in most cases, mortgage rates exceed savings rates. As such, if you have a lump sum in a savings account, the interest earned is often lower than the interest saved by paying off an equivalent amount of mortgage debt.

You’ll have more flexibility

Repaying your mortgage ahead of its due date grants you the freedom to take full ownership of your home sooner. Once the mortgage is settled, your property becomes entirely yours to use as you wish.

For this reason, it usually streamlines the process of buying and selling homes, as you're no longer bound by any restrictive terms, offering greater financial flexibility with either a smaller mortgage or none at all. Moreover, having this security can simplify downsizing efforts and facilitate lifestyle adjustments, such as transitioning to part-time work.

The disadvantages of early repayment

It’s best to prioritise more expensive debts

If you're juggling multiple debts alongside your mortgage, it's likely that those other debts carry higher interest rates. While mortgage interest rates have seen recent increases, they generally remain considerably lower compared to rates on credit cards and other unsecured loans.

Consequently, prioritising the repayment of smaller debts with higher interest rates could prove more financially beneficial in the long term. Once these higher-interest debts are cleared, you'll have additional funds each month to allocate towards accelerating your mortgage repayment, potentially enabling you to pay it off early anyway. Clearing any debt however should be discussed in detail with a qualified adviser before making any decisions.

You could get better returns elsewhere

If you're thinking of using your savings to pay off your mortgage, it's important to assess whether the interest you're earning on your savings outweighs the interest you're paying on your mortgage. In cases where your savings generate higher interest returns than your mortgage incurs, the opposite of what we mentioned previously, it may be more advantageous to retain your savings.

On this point, it's vital to recognise that once you've settled your mortgage, accessing the funds again can prove challenging without resorting to the inconvenience and expense of securing a new mortgage, which could pose difficulties. For example, if your household income has decreased, you may find it challenging to borrow the same amount again. We suggest that you take advice on every element before making any decisions.

You could lose out on tax benefits

Considering your age and the condition of your existing pension pot, allocating your savings towards your pension may offer greater benefits instead of using them to repay your mortgage. In certain scenarios, the tax advantages associated with pension contributions could surpass the interest savings from mortgage repayment.

Pensions provide a tax-efficient savings avenue, as the government enhances your contributions through tax relief. Additionally, if you have a workplace pension, your employer will contribute to the scheme as well.

You may incur charges

Most mortgages come with early repayment charges (ERCs), exit fees, or both. These charges are designed to compensate lenders for the income they would have earned from interest payments over the expected loan term. When you choose to repay your loan ahead of schedule, these fees and charges help mitigate the financial loss incurred by the lender due to the early cessation of interest payments.

ERCs can vary significantly based on the timing and size of your repayment. Typically, the closer you are to the end of your mortgage term, the lower these charges tend to be. However, they can still amount to substantial sums, often reaching into the thousands. It's essential to carefully assess these costs against the potential savings from early repayment. Also noteworthy is the fact that many lenders only allow borrowers to overpay by up to 10% annually without incurring penalties.

If you decide to overpay on your mortgage

When deciding to make overpayments on your mortgage, timing is imperative. If your mortgage interest accrues daily, it's advantageous to make the overpayment as soon as possible. Conversely, if interest is calculated annually, timing your overpayment to coincide with the interest calculation for the year is key.

Remortgaging can also be a strategic move in this regard. While it won't immediately eliminate your mortgage, switching to a product with more flexible terms can expedite repayment of your outstanding balance. If your current lender doesn't offer options for overpayment or offsetting savings, considering remortgaging to a flexible mortgage could be a solid choice.

Remortgage Deals

Whatever your decision, we at The Mortgage Genie represent a team of expert mortgage brokers who are equipped with the knowledge and experience to help you get the most suitable product for your personal circumstances and financial goals. Feel free to get in touch by calling 01915809890 today. And why not see how much you could borrow up to by using our remortgage calculator?