Paying off your mortgage fast can be supremely satisfying. You clear your debt and own the home that you’ve worked so hard for outright. But should you do it? It might seem like a no-brainer, but there are actually both pros and cons to paying off your mortgage quickly.
Should I pay off my mortgage quickly?
Not having a mortgage payment to tackle every month can be wonderful. Owning your home outright may mean you have more financial freedom to travel, retire, or finally go into business for yourself.
Also, you’re likely to save a lot of money. That’s because the longer you take to clear your mortgage, the more interest you’ll pay. The amount of interest you have to pay reduces as the size of your loan does – meaning if you pay it off sooner, your total payment (loan + interest) will be smaller.
But what about keeping money in your savings to earn interest? Doesn’t that make more sense than getting rid of your mortgage payments early? Usually not – and here’s why:
Interest rates apply to your life in two ways:
- The interest you have to pay on loans you’ve taken out. Interest rates on loans, like mortgages, tend to be high.
- The interest that gets paid out to you on the savings that you have. Interest rates on savings tend to be lower.
That means, if you’re looking to use the interest from your savings to pay for your mortgage interest, you might fall short.
The bottom line? Getting rid of that interest bill on your mortgage as early as possible may mean that you pay less in interest in the long run.
Why might you not want to pay off a mortgage as soon as you can?
The main reason is to have cash on hand when you need it. Making huge payments every month might leave you more strapped at the end of it.
And if you use your savings to pay off your mortgage as quickly as you can, you may not have as much money available to you when you need it for emergencies. Unexpected costs pop up all the time in life. You may need to make unexpected repairs to your home, for example. And if your money’s tied up in your mortgage, it may not be so easy to access it exactly when you want it.
Another thing to consider is whether you have any other high-interest debts that you should get rid of first. Credit card debts and some loans can come with very high interest rates – so it may make sense to tackle those first before overpaying your mortgage.
Ultimately, it’s all about finding the perfect balance. Longer mortgage terms may mean that buying a home is just more possible. But shortening your mortgage term may save you a lot of money.
If you’re curious about whether paying off your mortgage quickly is the right option for you, see the pros and cons of paying your mortgage off early.
Our top tips for paying off your mortgage quickly
1. Shorten your mortgage term
The first job here is to talk to your mortgage lender to see if this is possible. Not all lenders will allow you to shorten your term. You may have to look at remortgaging, where you negotiate a new mortgage with either the same lender or you find a different lender. (If the new mortgage is with the same lender, it’s what’s known as a product transfer.)
The pros of shortening your mortgage term? Your mortgage term will end sooner, and you’ll pay less in interest in total.
The cons? Higher monthly repayments.
Here’s what it might look like.
Say you have a repayment mortgage of:
- Based on a five-year fixed interest rate of 2% (A fixed interest rate means that the interest rate won’t change for the amount of time you’ve agreed on. In this case, that’s 5 years.)
- Over 25 years
- Your total mortgage cost (if the interest rate stays at 2% for the duration of your term) will be £190,500, including the interest. That’s if you don’t shorten your term.
Now, here’s the alternative:
- Say after five years, you’ve paid £38,100, decreasing the total amount you still have to pay to £152,400. (Nice!) You’ve got 20 years left on your original mortgage deal.
- If you were to shorten those 20 years to 18 years, your total would come to £149,472. That’s a saving of £2,928 in total.
- But here’s the catch – by doing so, you would increase your monthly payment from £635 to £692. So while you’ll save in the long run, you’ll have to pay up in the short term. Basically, you have to figure out what’s right for you.
Our handy mortgage calculator can help you work it out for your specific circumstances.
Overpaying on your mortgage means paying more – at a specific time or over a particular period – than you originally agreed to when you made your deal with your lender.
By overpaying, you pay off your mortgage sooner and guard against interest rate climbs in the future.
But there are some considerations here too. If you pay off your mortgage sooner than you agreed to, your lender may not earn all the interest they expected to. (You only pay interest as long as you still have a mortgage, and the larger the remaining amount on your mortgage, the higher the interest you pay.) That means that they may not be too keen for you to get overzealous about mortgage payments.
Talk to them to see what their rules are. You may be subject to what’s called an early repayment charge (ERC). This is a penalty that your lender may charge if you pay more than is allowed at a particular time, or if you pay off your full mortgage amount early. It’s usually worked out as a percentage of the remaining amount of your mortgage that you still need to pay.
Once you have the details, you can work out if the money you’ll save by making an overpayment is greater than the ERC. If so, it should make sense for you to go ahead. If not, it may be better to pay less than the amount where the ERC starts to apply.
There are two ways to make overpayments:
- Make a lump sum overpayment. Won the lottery? Received inheritance money? Business going well? If you find yourself with some extra cash lying around, you may want to put a chunk towards your mortgage. Additional payments can help you whittle down that total amount.
- Set up regular overpayments. Rather than paying a lump sum, you can start paying a higher monthly mortgage payment each month.
And while we’re on the topic:
3. Switch to mortgage products geared towards overpaying
When your current rate comes to an end, it will be time to remortgage (switch your mortgage deal). If you’re thinking about overpaying,you might want to look into some flexible mortgage deals, that are designed for overpayments.
But as always, you should consider whether any extra money you have should go towards your mortgage, or other debts or household expenses first. You know your situation best. There’s no one way to do this.
If you want to pay off your mortgage faster, Habito can help you remortgage to a shorter term or with a lender that'll accept regular overpayments. Chat with one of our mortgage experts today.