6 steps to paying off your mortgage early

Rachael Oku

by , Team PensionBee

at PensionBee

10 Sept 2018 /  

Sept 2018

6 steps to paying off your mortgage early

There are several financial milestones in life. From getting your first paycheck and paying off your student loan to getting married and having a baby - yet none is more satisfying than paying off your mortgage.

While the average UK term for repaying a mortgage is 25 years, it’s possible to be mortgage-free much faster with a little discipline and determination. If you’d like to pay off your biggest debt long before you retire, follow these six tips.

1. Remortgage for a better deal

Remortgaging is a great way to get a better interest rate on your mortgage. If, for example, you currently have a 25-year fixed-rate mortgage of £300,000 with an interest rate of 2.5% and remortgage for a 15-year fixed-rate mortgage with an interest rate of 2%, there’s potential to save tens of thousands of pounds in interest charges over the term.

2. Shorten your mortgage term

Rather than remortgaging, you may be able to stay with your current lender and shorten your mortgage term by a few years. While this will mean higher monthly repayments and some sort of adjustment fee, you’ll have a shorter path to being mortgage free, without any of the hassle that comes with changing lender.

3. Make a one-off payment

If you don’t want to top up your mortgage each month it may be possible to make a lump-sum payment instead. Whether you get a bonus at work, come into some inheritance or win the lottery, it’s worth using some of the money to pay down your debt.

4. Increase your monthly repayments

Whenever you get a pay rise or have extra cash at the end of the month your lender may allow you to increase the size of your monthly repayments. While you might not choose to spend your extra cash this way every month, a little can go a long way.

If, for example, you have a £100,000 mortgage with an interest rate of 6% over 25 years, overpaying by just £100 a month could save you £26,892.54 and reduce the term of your mortgage by more than six years.

5. Pay your mortgage fees at the beginning of the term

When you’re buying a property or remortgaging, there are lots of costs to consider and if your lender is charging a sizable fee it can be tempting to add it to the principal and worry about it later. While this might be convenient in that moment, it’s likely to be an expensive decision in the long run as interest will be charged on that amount annually, until the end of the term.

6. Offset your savings

An offset mortgage is linked to your bank or savings accounts, and lets you use your savings to reduce the amount of interest you pay on your mortgage.

This could save you thousands of pounds

If, for example, you have a mortgage of £300,000 linked to a savings account with a balance of £20,000, you would only be required to pay interest on £280,000. Over the lifetime of a mortgage this could save you thousands of pounds in interest.

A few things to consider

1. Restrictions on your mortgage

Before deciding to repay your mortgage early, you’ll need to look at the conditions of your loan to see if you’ll face any penalties for early repayment. Some mortgages stipulate that you can only repay a certain amount each month and overpayment could incur a fine.

These days most lenders will let you overpay by up to 10% annually without incurring a penalty, but it’s always worth checking your paperwork or contacting your lender for clarification.

2. Other debts

If you have other outstanding debts it might make better financial sense to repay them first, especially if the interest rates are higher. Credit cards and store cards, for example, often have high interest rates and the longer you take to repay a balance in full, the more you’ll end up paying.

3. Opportunity for investment

As mortgage interest rates have been consistently low for several years many believe there isn’t as much to gain from repaying your mortgage early than if rates were higher. If you’re financially comfortable and don’t have many years left on your mortgage you may want to consider investing in other things that will help grow your savings.

Putting extra money into your pension is always a good idea as you’ll receive tax relief from the government on all of your contributions, to an annual limit of £40,000 (2018/19). This means that for every £100 you contribute to your pension, HMRC adds £25 as a tax top up.

The more money you can pay into your pension now the more time it will have to grow, and there’s a good chance you’ll have more in retirement. If you’re unsure how much money you’ll need for a comfortable retirement, our handy pension calculator can help.

Listen or read the transcript for episode 4 of our podcast and find out more about mortgages and your retirement.

Risk warning

The information in this article should not be regarded as financial advice.

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