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Should you pay off your mortgage?
Paying your mortgage off early could save you a lot of money in interest charges. It also brings the comfort and of knowing that you own your home outright, but are there any downsides? In this article we look at how to decide whether you should pay your mortgage off early, how to go about it, and what the benefits and drawbacks are.
The advantages of paying off your mortgage early
There are a number of reasons you may want to be mortgage-free, but here are some of the main benefits:
The biggest benefit of repaying your mortgage early is the savings you'll make on interest - depending on the size of your remaining balance, length of remaining term and the amount you could afford to repay in addition to your usual repayments, it could be thousands
Generally, mortgage interest rates tend to be higher than savings interest rates - although be sure to check. This would mean that your money is put to better use paying off your mortgage more quickly
You'll own your home outright, potentially allowing you to reduce your income in the long term. You also obtain greater flexibility to do what you want to with your property, for example, let it out without switching to a buy-to-let mortgage
Overpaying when you can afford to do so will reduce the size of your outstanding mortgage balance. This means that if interest rates rise in the future, the increased payments will be less impactful than if you'd had a higher balance
The disadvantages of paying off your mortgage early
Of course, there are two sides to everything, so it's important to be aware of the potential downfalls in repaying your mortgage early too:
Some smaller debts, such as personal loans and credit cards may have higher interest rates, in which case your money could be better placed repaying those debts first
Most mortgage products charge an early repayment charge if you make overpayments beyond a specific amount (typically 10% of your remaining balance)
In some cases it may be possible to earn more interest on your savings than you would save by repaying your mortgage early - this is especially true when the Bank of England base rate is high
Devoting all of your funds to your mortgage will reduce how much you can put aside for retirement or an emergency fund
How to pay off your mortgage early
There are a number of ways that you could speed up the time it takes to repay your mortgage. You could even potentially combine some of the below options, depending on your circumstances:
Make monthly overpayments
Most mortgage providers allow you to overpay by up to 10% of the remaining on your mortgage each year, without incurring a penalty. Lenders calculate this differently, so it could total your overpayments in the the previous 12 months, or from a certain month each year e.g January to January.
This doesn't need to be a formal arrangement, as mortgage overpayments can be made as and when you can afford to do so. This means that just because you overpay one month, you won't be expected to the next, or ever again.
Paying a lump sum
If you receive a lump sum of cash, for example, from a bonus, a lottery win or an inheritance, you could potentially pay off your entire mortgage. Even smaller lump sums can go a long way to reducing your mortgage balance, reducing your overall interest and how long it will take to repay the remainder.
Be sure to check that your lender puts all of your lump sum towards reducing your balance, and not any of the interest - although most lenders do this automatically. Like with monthly overpayments, you'll need to be sure that you don't exceed the lenders maximum overpayment limit per year to avoid ERCs (early repayment charges).
Shorten your term
If you're looking for a more definite commitment to repaying your mortgage early than making random monthly or lump sum overpayments, you could reduce your mortgage term. Some lenders may be willing to do this without changing your mortgage, or you could look at remortgaging to a shorten your term - although remember to consider the fees.
Either way, reducing the term on your mortgage will automatically increase your monthly repayments. Keep in mind that your additional monthly payments will repay the balance and interest if you have a repayment mortgage - in contrast to making separate overpayments, which usually reduce your balance directly.
Switch to an offset mortgage
If you decide to switch mortgages or lenders, you might also consider an offset mortgage. This reduced the amount of interest charged on your mortgage balance by utilising savings in a linked account.
If you decided to set aside the money saved on interest, you could also use that as a lump sum overpayment to repay your mortgage early.
How much could be saved by paying your mortgage off early?
There are a number of factors that could impact how much you could save, so there is no straightforward answer here. It depends on:
Your method of overpayment
The amount you overpay by
How much you currently owe
Whether you'll need to pay ERCs or remortgage fees
With that said, if your mortgage interest rate is greater than the interest rate on your savings, you're likely to get more benefit from your money by repaying your mortgage early!
Here are some examples if your remaining mortgage debt is £150,000, you have a 25 year term and an interest rate of 5%:
£100 per month overpayment saves you £23,200 in interest, you repay in just over 20 years
£10,000 lump sum repayment saves you £22,185 in interest, you repay in 22 years
£20,000 lump sum repayment with repayment penalty on overpayments over 10% £5000 of your £20,000 overpayment would be lost in fees
Should you overpay your mortgage?
Overpaying your mortgage to repay it early can be a great way to save money on interest, however, there are a few things to consider:
Does your mortgage allow you to make overpayments? - Although most mortgage lenders allow this, usually you'll have a maximum overpayment threshold. If you go beyond that threshold you'd need to pay ERCs, which can defeat the point of your overpayment. If you're currently on your lender's standard variable rate (SVR) of interest, you can make as many overpayments as you like without incurring any fees
Are interest rates low? - You'll reduce your mortgage balance by making overpayments no matter what your interest rate, but you'll make the most of this while they're low
Do you have more expensive debts to pay? - Often smaller debts like credit cards, loans, overdrafts etc have higher interest rates than mortgages. This means that the interest on such accounts could potentially be costing you more
Have you considered your future? - Overpayments usually can't be taken back, unless you have a mortgage that allows you short payment breaks - and even then you usually only avoid paying your mortgage for a few months. Make sure you have an emergency fund in case of any change in circumstances, and have looked at retirement planning, before you devote all of your expendable income towards repaying your mortgage early
Compare remortgages
Whether you're looking to save money with a remortgage or borrow more, comparing deals with the help of an expert broker can help you get the best deal for your circumstances.
FAQs
Are there penalties for paying off your mortgage early?
Yes, unless you are on your lender's standard variable rate of interest (SVR) it’s most likely that your mortgage deal will be either fixed-rate or an introductory variable rate. Both of these mortgage types typically charge a fee if you want to repay your mortgage before the end of the term.
Many mortgages also charge fees if you make overpayments equal to more than 10% of your mortgage balance per year. This means that you could be charged even if you don’t completely repay your mortgage balance.
How much do you pay if you pay off your mortgage early?
It depends on a number of factors, including preference. If you're on an SVR you can usually repay your mortgage at any time without any ERCs, whether you repay £100 or the whole outstanding balance. Therefore it will cost you how much you want and can afford to repay.
If you're in some sort of mortgage deal, certainly fixed-rate deals, and often the introductory periods on tracker mortgages and discount mortgages, you'll usually be charged ERCs if you want to repay more than a certain amount (usually 10% per year) early. ERCs vary in cost from lender to lender and depending on how far through the deal you are, but a mortgage broker should be able to help you calculate this.
If you remortgage to shorten your mortgage term, it will usually cost you the price of remortgage fees, followed by larger monthly repayments. Again, the precise amount depends on your circumstances.
Ask your existing mortgage provider what they might charge if you were to shorten the mortgage term by a few years. Your monthly mortgage repayments would increase, but it could sometimes work out cheaper than paying the early repayment penalty.
ERC's are designed to protect the lender against loss of interest payment. According to UK remortgaging statistics 2024, early repayment charges can be anything up to 5% of the original loan value, although this will vary from lender to lender. Therefore it is advisable to shop around and check the terms and conditions before taking out a mortgage deal.
