Paying off your mortgage early can be one of life’s most satisfying and exciting achievements. But if you’ve saved, won, or inherited a lump sum of money, is clearing your mortgage balance always the right thing to do? Let’s take a look.
What are the pros and cons of paying off your mortgage early?
Why should you pay off your mortgage early?
The biggest reason to pay off some or all of your mortgage early is that it can save you a lot of money.
How? Well, mortgage interest rates tend to be much higher than the interest rates on savings. If you have an amount of money stashed away in a savings account, you’ll be earning less interest than you’re paying out on your mortgage. If you can spare the cash and pay off that amount of your mortgage, you’ll be better off in the long run.
Paying off your mortgage early also gives you freedom and security. By removing such a significant monthly expense, you could switch jobs or reduce your hours, retire early, or put that extra money towards travel, hobbies, or a new business idea.
And by owning your home outright, you no longer have to worry about losing it if you fail to keep up with mortgage payments.
Why shouldn’t you pay off your mortgage early?
There’s a theory that economists like to talk about when they’re weighing up two options. It’s called “opportunity cost.” This is a way of describing the value of the thing you’d be giving up if you chose the other option.
In this case, you’d be giving up the money in your savings account to pay off some or all of your mortgage – and this isn’t always a good idea.
The benefit of having cash at hand is that you can usually access it quickly if you need it. For example, you might want to pay for home improvements, handle unexpected costs or repairs, or splurge on a well-deserved holiday.
But once you’ve spent it on your mortgage, it’s no longer easy to access. Once the cash is tied up in your property, you’ll need to either sell your home or remortgage to release the equity if you want to get it back.
So, before you decide to clear your mortgage, ask yourself the following questions:
Early mortgage repayment: 3 questions you need to ask yourself
1. Do I have enough cash in reserve?
If you’re going to use your savings to pay off your mortgage early, make sure you’re not emptying your account and leaving yourself short. Keep enough in reserve to cover three to six months of living expenses – and a little extra for the unexpected.
2. Do I have more expensive debts to pay off first?
Mortgage interest rates are usually lower than other types of borrowing. If you have credit card debt, an overdraft, or unsecured personal loans, prioritise clearing these first. Otherwise, you could end up paying out far more in interest than you would save by paying off your mortgage.
3. Does my lender charge an early repayment fee?
Check your mortgage agreement to make sure you won’t be charged a hefty early repayment charge (ERC) or overpayment penalty, which can eat into the money you’d hope to save.
While some mortgage lenders don’t make it easy for you to overpay or clear your mortgage, others will let you overpay up to 10% of your balance without fees or penalties. A mortgage broker, like Habito, can help you find a mortgage deal that’s flexible enough to let you make extra payments when you can.
How much can I save by paying off my mortgage early?
Overpaying your mortgage can save you significant sums of money. Let’s look at a couple of examples: first a recurring payment, and then a one-off lump sum repayment.
- If you have a remaining mortgage debt of £100,000 to be paid off over the next 20 years at an interest rate of 3%, your monthly payments would be £474. If you decide to add an extra £100 to that each month (£574 in total), you could pay off your mortgage a full five years and 11 months earlier, saving £10,805 in interest alone.
- Using the same mortgage but paying a one-off £10,000 (10% of the balance), you could pay off your mortgage three years and six months earlier, saving £10,023 in interest payments.
How to pay off your mortgage early
There are several ways you can go about paying off your mortgage early. These include:
1. Shortening your mortgage term (and increasing your monthly payments)
Instead of paying an early repayment charge to leave your current lender, you might want to renegotiate your agreement and ask them to shorten the mortgage term (in other words, the length of the deal). This would mean your monthly payments would go up but, if you can afford it, you could clear your mortgage balance faster.
2. Remortgaging with a lender that lets you make overpayments
If your current lender doesn’t let you make overpayments (or throws up roadblocks in the shape of penalties and fees), you could remortgage and switch mortgage providers to one that does.
Just make sure you get the timing right. It’s always best to remortgage when you’re coming towards the end of your current fixed rate mortgage deal. That way, you’ll avoid any early repayment charges.
That said, there are times when it’s worth paying an early repayment charge (ERC) – like when the amount you’ll save is more than the cost of the ERC. A mortgage broker can help you run the numbers and make sure you’re saving money by switching early.
3. Switching to an offset mortgage
An offset mortgage is a type of mortgage that’s linked to a savings account with the same provider. As you top up the savings account, your mortgage balance is reduced by the same amount.
For example, let’s say you’ve got £10,000 stashed away in your savings and £100,000 left to pay on your mortgage loan. With an offset mortgage, you only need to pay interest on £90,000 (£100,000 minus £10,000).
With lower interest payments, you could afford to put more in your savings, and this money will ultimately help to clear your mortgage balance.
Want to overpay your mortgage? We can help you find the right deal
As a whole of the market mortgage broker, Habito can search across 20,000 mortgages from over 90 lenders to find the right type of mortgage deal for you. Once we know whether you want to make regular or one-off repayments, we can pick out the lenders that will suit your needs with terms that work for you. Get started today, for free.