Should you pay off your mortgage early?, by Matt Stevens
Your home is one of the most significant investments you'll ever make. Naturally, repaying the mortgage loan which allowed you to acquire the property brings a profound sense of relief.
Given the size of the financial commitment, many individuals think about the prospect of paying off their mortgage ahead of schedule. But is this the right decision for you? This article covers all the details surrounding the process to assist you make an informed choice.
How to pay off your mortgage early
The first thing to know is that there are different ways to pay off your mortgage early. You can either:
Make regular overpayments
If you find yourself in a financially comfortable position, with the ability to allocate extra funds to your mortgage each month, consider making regular overpayments. For instance, if your current monthly payment is £800, you can contact your lender and ask them to raise your Direct Debit by £200. Alternatively, you may choose to establish a standing order for supplementary payments.
It's noteworthy that these overpayments are not binding within your mortgage contract, affording you the flexibility to cancel such arrangements at any time.
Make a lump sum payment
Instead of consistently making regular overpayments on your mortgage, you have the option to occasionally, or as a one-time occurrence, make a lump sum payment through a bank transfer.
Shorten your mortgage term
Another way of paying off your mortgage early involves shortening the duration of your initial term. This adjustment results in higher monthly repayments, but leads to a decrease in the overall interest paid over the life of the loan.
Benefits of overpaying on your mortgage
Reduced Interest Payments: The primary incentive for mortgage overpayments is the reduction in interest paid. By maintaining a lower balance than usual, you effectively minimise the total interest accrued over time.
Shorter Interest Payback Period: Overpaying accelerates the repayment process, leading to a shorter mortgage term. This becomes especially beneficial if there are potential future increases in interest rates.
Lower Loan-to-Value (LTV) Ratio: Overpayments expedite the decrease in your LTV ratio, providing you with a favourable position for securing competitive deals and lower interest rates when considering remortgaging.
Higher Returns than Savings: Mortgage interest rates typically surpass those offered by savings accounts. Consequently, paying off your mortgage faster often translates to greater savings compared to the interest earned through alternative savings options.
Should you overpay on your mortgage?
As mentioned, overpaying on a mortgage offers numerous benefits for those with the capacity to do so. However, it's essential to take additional factors into account as well.
Can you make overpayments on your mortgage?
Prior to making overpayments on your mortgage, it's crucial to verify whether such actions incur any fees. Many mortgage products come with an early repayment charge (ERC) if overpayments exceed a specified limit.
For example, you might be restricted to overpaying up to 10% of your remaining balance annually, and the following ERC could potentially outweigh any financial gains, resulting in a net loss.
Do you have other outstanding debts?
Prioritise settling smaller debts, like personal loans or credit cards, before considering mortgage overpayments. This is recommended due to the typically higher interest rates associated with these loans compared to your mortgage.
Do you have a retirement or emergency fund?
If you haven't set up a robust retirement or emergency fund, it's advisable to first build these reserves before venturing into mortgage overpayments since you can’t take them back. This suggestion is based on the tax efficiency of pensions and the general importance of having a financial safety net to address unexpected expenses.
Switch to a flexible mortgage
It’s clear that the decision to pay off your mortgage early depends entirely on your unique circumstances and financial standing. If you find yourself in a position to make overpayments but are constrained by an ERC, it may be best to switch to a flexible mortgage.
Flexible mortgages, such as variable rate and offset mortgages, live up to their name by offering more versatility in terms of overpayments compared to conventional fixed-rate mortgages. Having said this, it's vital to carefully assess whether these options align with your specific case before reaching a conclusion.
We at The Mortgage Genie are a team of expert mortgage brokers who have the experience required to give you sound advice regarding paying off your mortgage early and can help you with a mortgage switch if you feel that it’s necessary. For further information, be sure to get in touch with us today by calling 01915809890. And why not see how much you could borrow up to right now by using our mortgage calculator?