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Should you pay off your mortgage early?

Whether you’ve got a lump sum or a little extra available every month, is paying off your mortgage early the best thing to do?

Should you pay off your mortgage early?

At first glance, it may seem like a simple answer, but depending on your circumstances, paying off your mortgage in full might not be the best option for you.

We break it down into pros and cons, and look at where to go next.

Pros of paying off your mortgage early

By paying off your mortgage early, you’re cutting down on the interest you’re paying on the loan and cutting down on the years you’ll have to pay it over.

That means you’re not only saving money on the interest, but that every month you’ll have a significant amount of money spare (with no monthly payments). This could be put into an ISA or high interest account to make your money work harder, or you could just enjoy it!

Being mortgage free means lower monthly costs and you have the security of knowing your home is completely your own. It also means that if you do end up selling it, the proceeds will be wholly yours.

For many people, being mortgage free gives them a lot more flexibility and opportunity. Some decide to go part time at their jobs, or try something new, knowing that they have the security of their home no matter what. And if you do decide you need a lump sum furtherdown the line, you can consider releasing equity from your home to access it.

Cons of paying off your mortgage early

It may not be the best use of your money. If you’ve inherited or come into a large sum of money, putting it into an account where it earns more interest than what you pay on your mortgage may be in your interest. However, it would be worth talking to a financial advisor about this.

If you’ve got debts with interest rates that are higher than your mortgage interest rate, you could actually cost yourself money by paying off your mortgage. By paying off the more expensive debts first, you will save yourself more money in interest payments.

If using all your savings means losing your safety net, you could be putting yourself at risk. Paying off your mortgage should leave you with more cash each month, as you’ll have fewer outgoings, but what if you needed to access your savings? If you lost your job, or need to repair your car or replace your boiler for example?

Paying off your mortgage may save you money in one way, but if you need to turn to credit cards and loans to survive, you’re costing yourself more in the long run.

Early repayment charges are a charge the lender will ask for if you pay off your mortgage before the expected term end. This is because they will be missing out on the interest you would have paid over those extra years. If the repayment charge is large, you might find you don’t have enough to pay off the mortgage and the charge.

How to decide:

  • Have you paid off any debts already?
  • Do you have an emergency fund you can access?
  • Is the interest on your mortgage higher than the interest on your savings?
  • Is your mortgage your biggest outgoing?
 
If the answers to the above are yes, then it’s likely paying off your mortgage is the right choice for you.
 

There are two main ways to pay off your mortgage early:

  • A lump sum
  • Regular overpayment
A lump sum can be used to pay off the entire remainder of your mortgage. This works well if you’ve come into a significant amount of money through inheritance, selling assets or a pay out from work. You may also have been saving long term in a high interest account for exactly this purpose. If you pay off your mortgage you’ll often face an early repayment charge. Make sure you know how much this is before you start the process.

Regular overpayment means you can overpay your mortgage each month, or at the end of the year. Most mortgage lenders will allow you to overpay by about 10% of the total balance per year.

If you overpay by more than this amount, you’ll face extra charges. Be sure to find out what they are and make sure you avoid them. Otherwise what you think is saving you money on interest may cost you more in charges.

Remember:

Whether you pay off your mortgage early, pay off a big chunk of it, or increase your monthly repayments, you’ll be cutting down on the amount of interest you pay and saving yourself money.

However, don’t forget to look into overpayment or early repayment charges, and consider whether your money is working harder for you in savings or in paying off your mortgage.

Try not to put yourself at risk or stretch yourself too thin to repay your mortgage, and always make sure other debts are dealt with first.

If you do pay it off early, be sure to celebrate your achievement and enjoy the moment!
 

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