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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?
Paying off your mortgage early may seem like an obvious choice, but it really depends on a number of factors. How much your mortgage is, whether there are early repayment fees, what your financial situation looks like can all impact this decision.
 
He we break down the pros and cons of paying off your mortgage early, either by overpaying regularly, or paying off the whole amount whenever you’re able.

Pros of paying off your whole mortgage early

Lump sum
 

If you’ve either saved up a lump sum, or received one through inheritance or other means, paying off your mortgage might be the first thing you think about. By paying it off you’ll save on interest and cut your outgoings.
 
This means you’ll have saved money on your property purchase, and that money you were paying into a mortgage every month could now be spent on other things. You could put it into an ISA or high interest account to earn interest, or simply 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 anything were to happen, you have a valuable asset that you could sell.

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 further down the line, you could consider releasing equity from your home to access it.
 

Gradual overpayment

 
If you don’t intend to (or can’t) pay off the whole amount it’s still worth thinking about overpaying your mortgage. This is where you pay off more than required. Your mortgage lender will have a limit on how much you can overpay by ever year. It’s usually around 10%.
 
Overpaying on your mortgage can cut down the number of years left, as well as the interest you need to pay. And if you stay within the allowed amounts, you won’t pay any overpayment fees. So if you find yourself with an extra couple of hundred pounds a month, it might be that the best use for it is paying off your mortgage and getting you to that mortgage-free moment a lot sooner.
 

 
Cons of paying off your mortgage early

For both lump sums and gradual overpayment, there are reasons why paying off your mortgage early might not be best – and it all depends on your financial situation.
 
For example, if you have a low rate mortgage, that money may do better in a high interest savings account. But it’s worth speaking to a financial advisor about this.

Another reason not to pay off your mortgage might be existing debts with a higher interest rate. Loans or credit cards that have a higher interest rate than your mortgage could actually cost you money. Most financial advisors say it’s best to pay off the highest interest rate item first.
 
What if you have no debts, but your circumstances are unstable? Perhaps you’re about to change jobs, take parental leave or are in any other instance where you might need a safety net. In theory, paying off your mortgage should leave you better off by a few hundred pounds every month, but it’s worth considering whether you need access to a lump sum.

If paying off, or overpaying, your mortgage now means you need to turn to credit cards and loans to survive, you’re costing yourself more in the long run.

If the early repayment charges are very high, it’s worth doing the sums on whether it’s a good option for you to overpay. You may decide to overpay up to the limit every year, and cut down your interest costs gradually. Or you may find that paying off the whole mortgage, even with the early repayment fee, still works out better for you.

 
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?
  • Are you still better off financially even with the early repayment charge?
 
If the answers to the above are yes, then it’s likely paying off your mortgage is the right choice for you.

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. You can work out just how much you could save by overpaying using this mortgage overpayment calculator.

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!

Updated November 2022 by Andi Forsythe

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