Should you pay off your mortgage early?
With mortgage interest rates so low, some argue that there’s no point in paying off your mortgage early. Others argue that paying off debt is always a good idea in an uncertain economy. We weigh up the options, so you can decide.
Early mortgage repayment – Questions to help you decide
Should you save or pay off your mortgage early? Answer these questions to help you decide.
1. Do you have any other more expensive debts?
Expensive debts are those which cost a lot to pay off over time.
Credit cards and store cards, for example, charge a high rate of interest over the course of a year.
Other examples might include unsecured loans, where the interest rate is significantly higher than the cost of your mortgage borrowing.
Always pay off more expensive debts before thinking about reducing your mortgage – but don’t rack them up again.
2. Are you putting money into a pension scheme?
On a £150,000 mortgage at 5% with 25 years remaining, paying off a £5,000 lump sum will reduce the interest by £11,500 and the repayment term by 18 months.
Pensions are a tax-efficient way to save because the government tops up your contributions with tax relief.
And, if you have a company scheme your employer might pay into the scheme too.
If you don’t have a pension and have money to spare, it’s important to think about paying into one.
The earlier you start, the sooner your retirement pot will start to grow.
So think about this before deciding to use your savings to pay down your mortgage early.
It’s also worth taking stock of any existing pensions you have to see if it’s worth paying more into them.
3. Could your family cope financially if you died?
Do you have dependants? The cost of putting in place life assurance is relatively low – if you’ve not got this already and have a family or other dependents then now’s the time to think about it.
4. Can you get a savings rate higher than your mortgage interest rate?
If you’re already contributing to a pension scheme, rather than pay off your mortgage it might make more sense to put your money into a savings account.
That’s if you can find one which pays a higher rate of interest than the rate you’re being charged on your mortgage.
To get an accurate comparison, work out what the rate amounts to, after you’ve paid tax on your savings.
Some savings accounts – such as ISAs or some National Savings Investments accounts offer tax-free returns you can benefit from.
Other things to consider if you want to pay off your mortgage early
Keep some money in reserve
Ensure you have saved enough money to keep you going for at least three months before paying off your mortgage early.
Will you be charged for overpaying your mortgage?
Check your mortgage deal to get an accurate picture of how charges can cut into any savings, which result from overpaying your mortgage.
You could be charged for paying your mortgage off early or making a monthly payment, which goes over your agreed monthly limit.
Many lenders will let you overpay up to 10% a year without penalties.
Do you have a flexible or offset mortgage?
Flexible mortgages – including offset mortgages – allow you to overpay your mortgage and then draw back the money if you need it – all without charge.
The benefits of overpaying your mortgage
If you overpay your mortgage it doesn’t just mean you have less to pay in future years, it might mean that you can pay your mortgage off sooner – sometimes even years earlier.
On a £150,000 mortgage at 5% with 25 years remaining, paying off a £5,000 lump sum reduces the interest by £11,500 and means you repay 18 months earlier.
Overpaying when interest rates are low means you’ll have a smaller mortgage to be charged the higher interest on.
If you decide to overpay your mortgage
If, after weighing up all the facts, you decide to overpay, then you need to time it right.
If your mortgage interest is charged daily, then the sooner you make the overpayment the better.
If it’s charged annually, then you need to time your overpayment so that it counts towards the calculation of the interest for the year.
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