How To Pay Your Mortgage Off Early
Your mortgage is almost certainly your biggest debt. It can seem a nice stable amount that’s best left alone, but reducing your largest debt has the biggest payoff in saving money.
When inflation is high, borrowing is a good idea as the price of money goes up making the debt reduce. But we’re in a time of historically relatively low inflation so that effect doesn’t apply. As wages are rising so slowly, following the financial crash, debts aren’t reducing in the way they generally have.
The interest rates on savings are also at an historical low so reducing debt makes more sense than building up savings.
To take an example, a £100,000 mortgage paid back over 25 years at an interest of 6% while see a saving of more than £26,000 with an overpayment of just £100-a-month. It will also be paid off six years early.
Currently, interest rates are relatively low. Mortgages like trackers or SVRs are therefore quite cheap. These low rates mean you should have extra money for overpayments.
If rates drop then the best way to use the extra money is by overpaying. For example, the mortgage used in the first example fell to 3%, then there would be an extra £170 to add to the overpayments, saving a further £20,000 in interest and cutting the length of the mortgage by a highly significant 11 years and 4 months.
Check the small print
You need to keep on top of the terms of your mortgage. Many lenders put a minimum on overpayments. If you don’t meet this minimum then the money will not be used to make payments against the mortgage until the end of the financial year. Essentially, you’re giving your lender an interest-free loan, which is very nice of you, but not the best financial sense. Pay over the minimum and your debt will be recalculated each month.
Flexible or offset mortgages are even better if you plan to overpay. The balance is calculated on a daily basis, so money you pay in has an immediate effect.
Don’t pay penalties
Another term on the mortgage agreement you should check is penalties for early redemption (fully paying off the loan) and maximum limits on overpayments. Check these limits carefully and do the sums carefully to check if overpayments are worth your while.
Though your mortgage is probably your biggest debt it’s also likely to be one of the best value loans you have. Look at all your debts in the round and pay off the highest interest debts first – credit cards and bank overdraughts are typically much higher than home loans.
Good financial discipline is key to paying off your mortgage early. It’s likely you’ll have budgeted for a repayment that fits comfortably with your finances and you may need to make cuts in other parts of your spending to make mortgage overpayments, either each month or as lump sums.
Niall Walsh is a journalist and writer and has worked for a variety of financial blogs. He has worked in London for a number of years and used yousellquick to sell his house.