Paying a mortgage off early

If you’ve been squirrelling away your pennies, or have recently received a windfall or inheritance, it’s likely that paying your mortgage off early might’ve crossed your mind.

There are advantages and disadvantages to doing this, however, so it’s important that you do your research before deciding to pay your mortgage off. Here, we look at the major pros and cons of settling your mortgage before the loan term is up.

Advantage: become debt-free sooner

If your mortgage is your only debt then paying it off is the best way to become debt-free for life.

There may be costs involved with paying your mortgage off early, 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. 

Disadvantage: not paying off more expensive debts first

Your mortgage is the big debt, but if you have credit card debts or car finance then you may benefit from paying those off first.

Mortgages have lower interest rates than other credit lines such as store cards, credit cards and vehicle finance. So while the sum of your mortgage may feel eye-wateringly huge, the interest on your smaller loans and credit agreements will cost you more.

It may suit your personal situation to pay off any smaller debts, such as credit cards, as a matter of priority. You can then think about using the extra monthly cash flow from eliminating these debts towards offsetting your mortgage – and still pay it off sooner than you expected.

Advantage: no more monthly payments

Paying off your mortgage gives you freedom of cash: no monthly payments means you’ll have several hundred pounds extra in your bank account each month.

This extra money leaves most people with a couple of options. Some prefer to make the most of the extra cash by taking more holidays and enjoying luxury items. Other people take the opportunity to reduce their income to restore a better work-life balance as they no longer have a mortgage commitment.

Disadvantage: possible early repayment fees

Most mortgages will incur an early repayment fee that can run into the thousands.

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 cost of this fee, particularly if you’re nearing the end of your mortgage term anyway.

Advantage: reduce total loan cost

Paying your mortgage off early, particularly if you’re not in the last few years of your loan term, reduces the overall loan cost.

This is because you’ll save a significant amount on the interest that makes up part of your payment agreement. Paying your mortgage off early means you won’t have to pay interest on the months you no longer need to pay, saving thousands of pounds as well as ending your mortgage years earlier.

Disadvantage: missed savings interest or pension benefits

Paying off a mortgage may not be the best option for you if savings interest rates are more than the interest you pay on your mortgage.

Similarly, if you don’t have a comfortable pension pot saved for your retirement, it’s worth considering making a large contribution to your pension plan to take advantage of the tax benefits this may provide.

Weighing up these options is complex and varies depending on the financial markets. Make sure you receive professional financial advice before you decide whether to invest your money or pay off your mortgage.

Options 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.

Overpaying your monthly payments may suit you if your household has an increase in your regular monthly income, such as getting a promotion at work. It’s also a good way to take advantage of low interest rates: paying off as much as you can while interest rates are low means there’ll be less of your mortgage remaining to pay off when interest rates are high.

You have a few options to consider:

Remortgage

If you’re out of the fixed term period of your mortgage, shop around to find 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 will incur additional costs, such as arrangement fees, so make sure you factor this into your decision.

Switch to an offset mortgage

If you have plenty of spare capital each month, or can afford to leave a large lump sum for your mortgage, 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 will reduce your payment term and save you thousands in interest.

Check your current loan agreement to find out if overpayments are allowed, or if you can negotiate a new monthly figure. Some providers will charge for this while other lenders will allow overpayments up to a certain amount each year without a penalty.

Speak to a mortgage adviser for more information

As you can see, paying your mortgage off early can save you thousands of pounds in the future. However, there are reasons to keep paying your mortgage and instead, investing your savings another way.

It’s a confusing situation to navigate, so it’s a good idea to seek professional advice before moving forward. Book an appointment with our team to find out what options suit your circumstances.