How to repay your mortgage early
Last reviewed on 13 June 2016
It can make good financial sense to pay off your mortgage early. Whether you increase your monthly mortgage payments or make lump sum repayments when you can, the quicker you can pay off your mortgage the less it will end up costing you.
Why repaying your mortgage early is a good idea
One of the best ways to cut the cost of your mortgage is to repay it early. This can save you thousands of pounds on interest payments and will leave you mortgage-free to spend your money on other things.
The interest rate on mortgages is nearly always higher than you can earn on savings, so using spare cash to reduce your mortgage makes sense. Of course, if you have more expensive loans such as credit card debts, it's usually best to pay these off first.
There are other reasons why you might not want to use all your spare cash to pay off your mortgage. For example, money used on mortgage overpayments cannot be got at easily, you may want to save for other things or you may want or take out other investments so that not all your money is tied up in your home. It's also a good idea to set aside money for a rainy day by creating an emergency fund to cover the unexpected.
How to do it
If you have some spare cash, there are various ways you can repay your mortgage early. These include making overpayments as and when you can afford it, paying off lump sums, using savings to reduce your mortgage balance and reducing the term of your mortgage by increasing your monthly repayments.
Increasing your mortgage payments
Overpayments can soon whittle down your outstanding mortgage.
For example, if you have a £100,000 mortgage for 25 years with an interest rate of 5%, your monthly repayments will be £585. Increasing your mortgage repayments by £50 a month will knock three and a half years off your mortgage term and save you £12,253 in interest payments. Overpayments of £200 a month would wipe nine years and eight months off the mortgage term and save £32,482 in interest.
The quicker you reduce your mortgage the sooner you'll be eligible for the best mortgage deals. This is because the smaller your mortgage is as a proportion of the value of your property, the more attractive you are to lenders.
Lenders have different overpayment policies so check the rules. For example, there may be minimum and maximum amounts you can overpay. So you may find you can only overpay up to £500 a month or that overpayments have to be at least £50 a time.
Also, check how quickly overpayments are taken off your outstanding mortgage. While most lenders readjust the amount of interest you have to pay on your outstanding loan immediately, others may not recalculate it until the end of the year.
If you want to overpay more than is allowed, you could overpay the maximum each month and put any extra in a savings account for a lump sum repayment later.
Paying off a lump sum
If you have savings, a maturing investment, a windfall or inherit some money, you may want to use this to pay off a chunk of your mortgage. There may be restrictions on when you can do this without incurring an early repayment charge, so check your mortgage terms and conditions first.
If you are permanently able to pay more for your mortgage, you could reduce the term. Using the example above, it would cost an extra £75 a month to pay off the mortgage in 20 rather than 25 years. But if you change the term of the mortgage you may not be able to change it back if you later find you cannot keep up the higher repayments.
If you have substantial savings but don't want to tie these up in your mortgage, you could consider an offset mortgage. This is where your savings are used to reduce the balance of your mortgage which you have to pay interest on while still allowing you access to your savings.