Paying off your mortgage early can give you peace of mind and can save you money in the long run by accruing less interest. Michael Gyapong, Senior Mortgage Adviser for Natwest, has five top tips to help you pay off your mortgage faster.
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1. Shorten your repayment term
When it comes to budgeting what you can pay each month, most lenders typically suggest a 25-year repayment period.
However, this is not a concrete rule; you have the option of taking out a loan for as few as five years if you are able to manage the higher monthly payments. This will save you money in the long run.
For instance, if you borrowed £200,000 over 25 years at 3% interest, you’d have to pay £948 per month. This would add up to a total of £84,527 in interest payments to the lender.
But if you shortened the repayment period to five years, you’d have to pay £3,594 each month, but the total interest you’d give to the lender would be reduced to £15,624.
Gyapong explains: ‘Many homeowners are unaware that they can refinance their loan to a shorter term, meaning they can pay it off sooner or make more payments to lessen their balance.
People usually use their disposable income on unnecessary things like takeaways or shopping, but if they used that money to pay off their mortgage, it can help them save tens of thousands of pounds in interest.’
He adds: ‘I recently helped a first-time buyer who was considering a 35-year mortgage term without knowing that it was not necessary.
When we looked at their budget, we were able to reduce the term to 19 years and 11 months without stretching their finances too much or leaving them with a tight spending budget each month. This saved them £35,000 in interest – a considerable sum of money.’
It’s possible to apply to reduce your mortgage term at any time, even if you have a fixed rate. A fee may be charged and lenders may also run affordability checks to make sure the new payments are manageable.
Do your calculations and see what term you can afford. If you need assistance, talk to an independent fee-free mortgage broker.
2. Pay back a little extra each month
Increasing the amount of your monthly mortgage direct debit – even just a little – can help to reduce your mortgage term and the total amount of interest you pay.
Most banks and building societies allow you to overpay up to 10% of your loan amount each year without penalty, even if you’re in a fixed rate deal. Contact your lender to find out more.
Gyapong says, “Customers who aren’t in a fixed rate can overpay with no charge. Savvy customers will use their 10% allowance, and before they get a new deal, they’ll make an extra overpayment, so they won’t pay any additional charges.
This helps to pay off the mortgage balance faster and could also help to get a cheaper interest rate.”
3. Pour in any financial windfalls
Instead of or in addition to reducing your mortgage by making small extra payments each month, you can make larger one-off payments such as bonuses, dividends, or inheritances. This will have a similar effect when it comes to lowering the total amount of interest you pay.
For this to be possible without incurring any extra charges, you will need to have a mortgage that is fully flexible.
This is because it will be seen as an overpayment, and standard mortgages typically restrict overpayments to 10% of the outstanding balance per year.
4. Consider an offset
Rather than use it to pay off your mortgage, you may prefer to keep your savings pot aside for a rainy day. You can still use it to reduce your mortgage debt, though.
Offset deals use your total savings balance to subtract from your mortgage debt, leaving you to only pay interest on the remaining amount. For instance, if you had a £200,000 mortgage and £20,000 in savings, you’d pay interest on £180,000.
In the long run, this will help you save on interest and pay off your debt quicker, even if you keep your monthly repayments the same. To make this arrangement work, you’ll need to have your savings with the same bank or building society as your mortgage debt.
You won’t earn interest on your savings, but you’ll still save more on debt interest, plus you won’t have to pay any tax on the interest you would have earned.
5. Switch to a better mortgage deal
You don’t have to spend a penny of your hard-earned money to pay off your mortgage quicker. All you need to do is secure the lowest possible interest rate.
When looking for your first mortgage or when your current deal ends, such as a fixed rate, discount, or tracker, it’s important to shop around.
Bear in mind that the lowest mortgage rates usually come with the highest set-up fees, so make sure to factor these in.
Gyapong reminds us that mortgage products with fees reduce the interest rate charged, but depending on your mortgage balance and the interest saved, it may not always be financially beneficial to choose a fee-paying product.
Furthermore, don’t forget that if you add the cost of the fee to your mortgage, you’ll have to pay interest on that amount as well.
Even if you’re already a homeowner, your credit score will still be taken into consideration when you apply for a new mortgage. Thus, it’s wise to keep an eye on your credit score.
Is it worth paying your mortgage off early UK?
Paying off your mortgage early can be an advantageous move.
You can save on interest payments, freeing up funds that can be spent or invested, as well as benefit from the security of having your home without a mortgage. For some, becoming mortgage-free sooner rather than later makes a lot of sense.
Is there a disadvantage to paying off mortgage?
If you devote additional resources to paying off your mortgage, you’ll no longer have access to that money and that’s one of the drawbacks.
It’s important to have an emergency fund in place before doing so – usually three to six months worth of living expenses – for any unexpected financial needs.
How aggressively should I pay off mortgage?
Homeowners are often advised by financial advisors to pay off their mortgage as quickly as possible. Paying it off sooner means you will pay less interest overall. Furthermore, once your mortgage is paid off, your housing costs will be virtually eliminated.
So, if you pay your mortgage every two weeks, it can reduce the daily interest and, therefore, help you take years off your mortgage term!
So… Can You Sell a House With a Mortgage?
Selling a home with a mortgage is easy, as long as the loan is portable. If it isn’t, you can use the proceeds from the sale to pay off the debt. If that isn’t an option, you may be able to pursue a short sale.
Before making any significant decisions related to your mortgage or sale, it is best to consult with a mortgage broker or financial advisor. They can help you understand the potential consequences of your actions and provide helpful advice.
Property Saviour can help you sell your home quickly, regardless of whether or not there is a mortgage. We will provide you with a free, no-commitment cash offer right away. The entire transaction can be completed in seven days.
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If you want to learn more about the services we offer, feel free to contact us. We’d be happy to discuss your needs.
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