Thinking of paying your mortgage off early? If you have the means to do it, that’s great! Paying off your mortgage early can save you a tonne of money and leave you mortgage-free much earlier than you might have planned. While the advantages may be obvious, there are a few risks to look out for. Keep reading to find out if paying off your mortgage early is the right decision for you.
How can I pay off my mortgage early?
First things first, let’s look at how you can pay off your mortgage early. There are four main ways that you can go about it:
Overpay
Overpaying involves increasing your monthly payments and paying more than the required amount each month. This would not only reduce your mortgage term but will save you money on interest, too.
This is a good option if you’ve had an increase in monthly income, like a pay rise, for example.
Most mortgages let you overpay by up to 10% each year, but it’s important that you check with your lender first. Some lenders might not allow it at all.
Shorten your mortgage term
This is a similar option to overpaying. By shortening your mortgage term, you can pay off your mortgage in less time, which will require higher monthly payments.
Pay a lump sum
If you’re lucky enough to find yourself with a lump sum big enough to pay off your mortgage, this might be the best method of doing it. Perhaps you’ve had a bonus that will drastically reduce how much you owe, or you’ve inherited enough to pay off the whole mortgage in one go. Either way, paying off your mortgage with a lump sum will save you thousands in interest.
But don’t forget – you’re likely to have to pay early repayment charges (ERCs) for doing this, so make sure you have enough to cover them. Also make sure that the amount you’d pay in ERCs doesn’t outweigh how much you’d save on interest.
Switch to an offset mortgage
If you have either a lump sum sitting in the bank or a considerable amount of extra money left at the end of each month, you could consider an offset mortgage.
Offset mortgages link your savings account to your mortgage and the money in that savings account is used to offset the cost of the mortgage. This saves you interest and helps you pay it off earlier. As an extra bonus, it can also help you dodge those early repayment charges!
Remortgaging to pay off your mortgage earlier
There’s actually a fifth way you can pay off your mortgage earlier – remortgaging. If you’re coming to the end of your fixed term, there’s a chance you could secure a new and better deal by snagging a better interest rate that allows you to bring your mortgage term down and pay it off earlier.
But remember, remortgaging often involves extra costs such as arrangement fees, so you’ll need to consider this.
What are the pros and cons of paying off your mortgage early?
As you might expect, whichever way you might choose to pay off your mortgage early will come with its own pros and cons.
Pros:
- Become debt-free sooner than expected
If your mortgage is your only debt, paying it off would make you debt-free. Wouldn’t that be nice?
- No more monthly payments
Without the burden of monthly payments, your money is yours to do with as you please!
- Reduce the overall loan cost
Having your overall mortgage cost looming over you like a dark cloud can feel like a lot of pressure. By paying it off entirely or even simply reducing it, you save on interest and reduce the total amount you owe.
Cons:
- Misdirecting your money
If you have other debts, the mortgage loan might not be the best one to pay off first. Whether it’s a car loan or credit cards, you should find out which one leaves you better off by paying early. A mortgage adviser can help you figure this out and be strategic with your money.
- Loss of tax and interest benefits
If you’re eligible for interest benefits related to retirement accounts or other long-term investments, paying off your mortgage early could mean you lose them.
- Early repayment charges
As mentioned earlier, paying off your mortgage could incur early repayment charges. If these charges are bigger than the amount you would save by paying your mortgage off early, it may not be worth it at all.
Mistakes to avoid when paying off your mortgage early
If you’re beginning to think paying off your mortgage early is right for you, keep the following things in mind to avoid making some common mistakes:
1. Only paying interest with your overpayments
If you have chosen to overpay your mortgage on a monthly basis, make sure you know exactly where your overpayments are going. You’ll need to state that the extra money is to go towards your loan balance, not the interest.
If you don’t clarify this with your lender, they might put it towards the interest instead and you wouldn’t actually be paying off your mortgage loan.
2. Not checking early repayment charges
We’ve mentioned ERCs a few times now, but it’s important you understand why they’re there and why you might be at risk of them. Your mortgage lender makes money from the interest you pay on your loan. If you pay your loan off early, they miss out on the money they’d have made on the interest, so lenders cover themselves by putting in early repayment charges.
They’re usually a percentage of your loan and will differ from lender to lender. Make sure you check with your mortgage lender before you begin overpaying. After all, there’s no point if you’re going to lose money!
3. Using every last penny
It can be tempting to put every last penny you earn towards paying off your mortgage. But just because you can doesn’t mean you should. While it is a quick way to get rid of your debt, it doesn’t leave you any legroom for emergencies.
Make sure you’re also putting away a bit of money into a savings pot for emergencies instead of spending all of your extra cash on overpayments. When you’re happy with the size of your rainy-day fund, then you can think about putting even more money towards your overpayments.
Would overpaying my mortgage affect remortgaging?
Yes, in the sense that it’ll put you in a better financial position when you get to remortgaging.
Making overpayments lowers your Loan-to-Value (LTV), which is what lenders look at when you remortgage. The lower your LTV, the more mortgage options you’ll have available to you.
Paying your mortgage off early can save you money, reduce your loan cost, or even free you from debt entirely. But it isn’t as simple as it sounds, so it’s important to assess whether or not it’s the right decision for you.
Speaking to your mortgage advisor is the best way to understand the options of overpaying your mortgage – from making a lump sum payment to overpaying monthly – so you can be confident that you’re doing the right thing for your own personal and financial situation.
FAQs
Is it a mistake to pay off a mortgage early?
Unfortunately, only you (and your mortgage adviser) can answer this question. If you have bigger or more urgent debts looming over you, have tax benefits you could lose, or early repayment charges to face, paying off your mortgage might not be the right thing to do. Make sure you’ve considered all the risks before deciding.
Is it worth paying off my mortgage early?
Paying off your mortgage early – whether in full or through monthly overpayments – can help you rid yourself of what is likely to be your biggest financial commitment. Speak to your mortgage advisor to make sure you understand all the pros and cons of paying off your mortgage early.
How much could I be charged for paying my mortgage off early?
This ultimately depends on how much you have left to pay off your mortgage. Charges you might have to pay often range between 1-5 percent of what you owe.
The best thing to do is speak to your lender to find out how much you would have to pay to decide whether or not it’s worth it.
