Repaying your mortgage sooner rather than later sounds like a good idea, but there are things to you need to consider before you choose to do this. The reason for this is because depending on what mortgage deal you have paying your mortgage early could result in you paying out more money than you want to, therefore not benefitting you. In this guide we are going to help you decide by looking at the advantages and disadvantages of paying your mortgage early, what to consider before making early repayments and the different ways you can pay off your mortgage.
Advantages
One of the main advantages of making payments early is your total loan cost will be reduced. You will be able to save a lot of money due to not paying interest on the months you no longer need to. It will also mean you could pay off your home sooner and you will own the home outright. This will give you peace of mind that the debt is paid.
Another advantage of paying your mortgage off early is further down the line you will have extra money each month. Which you can then use for savings, holidays or anything else you would like to do with the extra money.
Disadvantages
One disadvantage of repaying early is there might be a early repayment fee you need to pay. Lenders charge this fee because for example, you are on a fixed mortgage deal the lender would have expected to earn a certain amount of interest and if you pay of your mortgage quicker then they lose out on money.
The cost of the fee can depend on how much money the lender borrowed you and how long you have been in the deal for. To find how much you will owe in fees the mortgage lender will look at the amount you still have outstanding and calculate a percentage of it. This amount is usually between 1% and 5%. The further along in your deal the less money you are likely to pay in fees.
However, speak to your lender as you may not have to pay a fee, as most will allow you to pay an overpayment of 10% off your mortgage balance per year and you will not have to pay a penalty for this.
Something else to consider is if you have other debts such as a credit card or you have car finance then it might be best to pay these debts of first before your mortgage. This is because the interest rates for mortgages is usually lower than other debts. So, you might be at a disadvantage paying your mortgage back rather than debts that have higher interest rates.
Emergency funds
Before making early mortgage repayments it is a good idea to make sure you have emergency funds. If you was to use all your money paying your mortgage back and an emergency happened where you needed money it could result in your needing to borrow again. So, it is recommend to not start paying more on your mortgage until you have some savings.
Ways to pay off your mortgage
Overpay your mortgage – this is when each month you pay more than you are required to. This will mean you will end up paying less interest therefore, you can pay off your mortgage quicker. However, some lenders do penalise this or place caps on them so check your terms and conditions.
Shorten your mortgage term – if you choose to shorten you mortgage term then this means that your mortgage lender has agreed you can pay the money back you owe in a shorter amount of time. Something to consider with doing this is your monthly payments are likely to cost you more, so you need to be able to afford this. However, even with a monthly payment increase it could end up being cheaper that paying the penalty fee.
Remortgage – something you can do is remortgage, there is the possibility that if you switch to a new mortgage provider you can get a deal with lower mortgage interest rates. Something to consider though is if you chose to remortgage your lender could charge you a early repayment fee which could end up with you paying thousands of pounds out. So, you need to find out if you would get charged a penalty fee and if the amount you save is worth the penalty fee you could potentially get.
Pay a lump sum – it is possible for you to pay a lump sum to your mortgage provider to help become mortgage free quicker. However, it is best to speak to your lender about paying a lump sum as if the amount you want to pay goes over your overpayment allowance of 10% you may have to pay a fee to your lender.
Questions to ask yourself first
There are things you should consider before making the decision to make early repayments. Before doing it you should ask yourself:
- Will there be any penalty fees to pay? The charge for a penalty fee could end up being more than you will save making early repayments.
- Do you need an emergency fund first? If you haven’t got an emergency fund it might be a better idea to do this first.
- Can you put the money to work in better places?
- What is the interest rate on your mortgage? Can you get a better rate?
- Will your income change? if this is a chance your income will decrease you might want to thing about keeping your savings incase they are needed.
- Will you be coming into some money? If you will be and your already have an emergency fund you can use this extra money to pay off your mortgage?
- Are there other loans you should think about paying back first with higher interest rates before repaying more to the mortgage lender.
Summary
Choosing whether or not to repay your mortgage early is a tough decision but, hopefully this guide has helped you understand the advantages and disadvantages of doing it and the ways you can make payments if you wish too. If you are looking to read more about mortgages you can read our blog post here ‘Guide to mortgages’.
