It might seem impossible, but there are ways to help you pay your mortgage off earlier than planned
Being mortgage free faster is something many of us only dream of, but it may be easier to do than you think and can save you thousands of pounds. Take a look at our tips to see if you could pay off your mortgage faster.
Overpay your mortgage each month
Paying as little as an extra £50 a month on top of your normal mortgage repayment can make all the difference to how much interest you pay and how quickly you’re rid of your mortgage.
For example, if you owe £130,000 and have 20 years left on a 2.5% repayment mortgage, by paying an extra £50 a month, you’ll pay off your mortgage 1 year and 8 months earlier, saving £3,235 in interest. If you overpay by £100 a month, it would be reduced by 3 years and 1 month and you’d save £5,920 in interest.
Before changing anything, check that there aren’t any penalties for overpaying. Most mortgages now allow some level of overpayment – typically up to 10% of the total mortgage balance each year on fixed rate deals (variable rates, where your mortgage rate can go up or down, often don’t have penalties). Be careful not to go over any limits, as the penalties can run into hundreds or even thousands of pounds.
If you can’t afford to pay any extra, check to see if you could switch to a better mortgage rate. Then, instead of paying the new lower mortgage repayment, simply continue to repay what you were paying before and you’ll pay off your mortgage faster.
Make a one-off lump sum payment
If you come into some money, you could use it to pay off a chunk of your mortgage.
For example, if you owe £130,000 and have 20 years left on a 2.5% repayment mortgage, by making a one-off overpayment of £5,000, it would save you £3,132 in interest and mean you pay off your mortgage in full 11 months earlier. If the overpayment was £10,000, it would save you £6,068 in interest and mean you’d be mortgage free 1 year and 11 months earlier.
Again, make sure you won’t incur a penalty before doing anything.
Shorten the length of your mortgage
You can simply ask your lender to reduce the term of your mortgage – say from 15 years to 10 years. This will increase your monthly repayments, but you’ll pay less interest overall. Think carefully before doing this – it’s a much less flexible option than overpaying, which you can switch on and off as it suits you. But if you prefer the discipline of higher repayments this could work for you.
There are various mortgage calculators online, such as the one on the Money Supermarket website, which can show you how much quicker you can pay off your mortgage if you make regular or one-off repayments, as well as how your repayments are affected if you increase or reduce the term of your mortgage.
Think things through
As with all financial decisions, it’s important not to make the decision to pay off your mortgage early in isolation – there are a number of things to think about first.
Things to think about before making changes to your mortgage
Have you got an emergency fund?
It’s a good idea to use any spare cash each month to build up a pot of accessible savings before you think about overpaying your mortgage. Aim for at least three months’ salary in savings.
Do you have any more expensive debts?
Credit card, store card and payday loan type debt will all be more expensive than your mortgage, so it makes sense to pay these off first.
Can you get a higher rate on savings?
If your mortgage rate is low, you could make your money work harder by putting it in a savings account. For example, if your mortgage rate is 2% but you can earn 2.5% interest on your savings, you may be better off putting your money in the savings account.
Do you need life insurance?
If you have people who are financially dependent on you, you should consider having life insurance.
Are you paying into your workplace pension?
The sooner you start to build up a pension the better. Employer matching makes this a particularly valuable option, so it’s worth considering before you use money to repay your mortgage.
Might you need the money in the future?
With most mortgages, once you’ve made your payment you can’t draw it back again. If you can borrow back overpayments, you may prefer to get your mortgage balance down, but not pay it off completely, so you can access overpayments if you need money in the future.
You may also want to consider taking impartial financial advice before making any decisions. A financial adviser will be able to give you personalised advice based on your individual circumstances.
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