Written by: Danny Belton - Head of Lending
In this article:
Is it worth paying off my mortgage early?
What are the advantages of paying off a mortgage early?
What are the disadvantages of paying off a mortgage early?
What options are there for paying off your mortgage early?
How much will I be charged if I pay my mortgage off early?
Does overpaying a mortgage affect remortgaging?
What are the benefits of being mortgage free?
Paying off your mortgage early can save you a lot of money, especially if you’re not near the end of your mortgage term yet. However, you could have more expensive debts that would be better to pay off first, so it’s important that you do your research before deciding to pay your mortgage off.
Whether you’ve recently come into a lump sum or have been saving for a while, paying your mortgage off early may have crossed your mind.
Here are the pros and cons of settling your mortgage before the loan term is up:
Is it worth paying off my mortgage early?
You could potentially save a substantial amount of money on your mortgage by paying it off early, but this is not the only benefit. For a start, it’s one less monthly bill to pay and being mortgage free is a relief for many. That being said, it may suit your needs better to invest the lump sum of money elsewhere or pay off other debts first to make yourself more financially secure.
What are the advantages of paying off a mortgage early?
Become debt-free sooner
If your mortgage is your only debt, then paying it off means you’ll become debt-free.
There may be costs involved with paying your mortgage off early, such as an early repayment charge. So, even if you have enough to pay it in full, speak to a mortgage adviser to make sure you’ll be able to afford it.
No more monthly payments
Paying off your mortgage means having freedom of cash, giving you more financial options.
You could use this extra money to save, invest, or even change your lifestyle, whether it’s taking more time off or building a better work-life balance. What you do with this money is up to you, but you have plenty of options.
You could even use this as a way to get involved with the property market by becoming a landlord.
Check out the article below to learn more:
Reduce total loan cost
Paying your mortgage off early, reduces the overall loan cost, particularly if you’re not in the last few years of your loan term.
You’ll save a significant amount on the interest that makes up part of your payment agreement. Remember that interest is calculated at the total cost of your mortgage, which is determined by your mortgage term.
For instance, if you have three years left on your five year fixed rate mortgage, then you could consider paying off the outstanding balance to avoid any more interest payments.
A mortgage adviser can advise whether it is worth paying your mortgage off early and accepting an early repayment charge, or if it would make more financial sense for you to wait until the end of the fixed period before paying your mortgage off.
What are the disadvantages of paying off a mortgage early?
This depends on your personal circumstances. For instance, how large the lump sum of money is, how much additional debt you have outside of your mortgage, what future plans you have (retirement goals, weddings, holidays, supporting your children financially etc.) This all helps to paint a picture of your overall financial situation. A financial adviser can then make an informed recommendation on how best to utilise your lump sum, whether that is paying off your mortgage, adding to your pension pot to boost your retirement income, or investing in stocks and shares.
Not paying off more expensive debts first
If you have other debts (store credit cards, credit cards, phone bills, car loans etc.) it can be tricky to know which to focus on paying off first. By speaking to a mortgage adviser, they can look at your whole debt combined and help you decide whether it would be worthwhile to pay these debts first, or focus on paying your mortgage off.
Possible early repayment fees
If you pay your mortgage off, or a large chunk of it, earlier than planned, then you’re likely to incur an early repayment fee that can be expensive.
Sometimes, it’s still worth paying this fee if it’ll save you interest costs in the long run. However, it’s important to take into account the overall cost, particularly if you’re nearing the end of your mortgage term anyway.
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What options are there for paying off your mortgage early?
There are two main ways to pay your mortgage off early: pay a lump sum in full or increase your monthly payments.
Increasing your monthly payments may suit you if your household has an increase in your regular monthly income, such as getting a promotion at work.
There are a few ways to do this:
Remortgage
If you’re coming to the end of the fixed term period of your mortgage (especially if you’re already out), speak to us to secure a new deal. Take advantage of the fact you’ve already paid off some of your mortgage, which opens up better rates due to a lower loan-to-value (LTV) ratio.
Remortgaging may incur additional costs, such as arrangement fees, so make sure you factor this into your decision.
Check out our repayments calculator to see what your new repayments could look like with a new mortgage deal.
Switch to an offset mortgage
If you have plenty of spare capital each month, or can afford to leave a large lump sum set aside for your mortgage, you could consider an offset mortgage.
This links a savings account to your mortgage. Money in your savings account is used to offset your mortgage cost, saving you interest and helping to pay it off earlier. Doing this can also help you to avoid early repayment charges.
Pay a lump sum
If you have enough in your savings to pay your entire mortgage, plus early repayment fees, consider paying the entire mortgage off in one go.
Remember to seek financial advice before doing this, as it may change your financial or tax position.
Increase monthly payments
Larger monthly payments could reduce your mortgage term and save you thousands in interest.
Check your current loan agreement to find out if overpayments are allowed. Some providers will charge for this while other lenders will allow overpayments up to a certain amount each year, without a penalty.
How much will I be charged if I pay my mortgage off early?
This depends on how much is outstanding on your mortgage balance, but it can typically range between one and five percent of what you still owe on your mortgage at the time you pay it off.
Your mortgage adviser will make you aware of any charges you will have to pay if you decide to pay off your mortgage early.
Does overpaying a mortgage affect remortgaging?
Overpaying your mortgage will put you in a stronger financial position when it’s time to remortgage.
Making overpayments is a great way to lower your loan to value (LTV). This is the amount of money you have borrowed, compared to your home’s value. Lenders look at your current LTV when you remortgage, and the lower your LTV, the more mortgage options are available to you, and at better rates too.
What are the benefits of being mortgage free?
For many, the most beneficial part of being mortgage free is no longer having a large financial debt. It can make it easier to buy and sell your home and it’s a large asset that you can use to secure a future for yourself and your children.
Speak to a mortgage adviser for more information
Paying your mortgage off early can save you money in the future but knowing if it’s the right decision for you is important.
It comes down to how comfortable you are living with debt and if, actually, there are other things that would be more beneficial to you, such as paying off a car loan first, or perhaps investing your savings another way would make more financial sense rather than paying your mortgage off.
It can be a confusing situation to navigate, so seek professional advice before making any final decisions.
Book an appointment with our team to find out what options best suit your circumstances.
Frequently asked questions
Your mortgage is most likely your biggest financial commitment. By paying it off in full, you can save money on interest payments and have more disposable income. Seek professional advice before deciding whether it is right for you.
If you have enough savings to pay off your outstanding mortgage, then this is always a good idea. Being debt-free is the better option as it will ultimately save you money.
Whilst the end result may be the same (lowering your mortgage term, paying off less interest), everyone’s circumstances are different. If you can’t afford a lump sum but you can afford to pay additional smaller amounts every month, then speak to a mortgage adviser. They can also make sure you don’t incur any early repayment charges.
In 2022, more than half of all homeowners in the UK owned their home outright at the age of 61.1 With that being said, with the average first time buyer age increasing, and longer mortgage terms becoming more popular, we’d expect to see this age increase over the coming years.
This comes down to your individual circumstances, and the state of the economy at the time. For instance, if you’re getting a higher interest rate on savings than you are on your mortgage, then it might be better for you to keep your money in savings. Whereas if the interest rate on your mortgage is higher, then it would be more beneficial to pay your mortgage off.
Paying off your mortgage will not significantly affect your credit score. A mortgage paid in full will remain on your account for 10 years. During this time your score may drop slightly, but this is nothing to worry about. It is simply because of a reduced credit mix. Over the course of the 10 years, if you keep up with all other debt repayments, the slight decline you saw in your credit score will rectify itself. To summarise, you should not let this put you off paying your mortgage off.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
Related Articles
Can I change the term of my mortgage?
How to become mortgage free
The ins and outs of mortgage overpayments
References:
1 ONS, 2024