Ever wondered what you should do to pay off your mortgage early? You’re not alone. The word ‘mortgage’ literally translates as ‘death pledge’ in Old French and Latin, which gives you an idea of how long this particular loan can take to pay off.
But what if you’re not happy to be making monthly payments until you shuffle off this mortal coil? Is it possible to cheat the ‘death pledge’ and enjoy your middle age and later life without being saddled by a ginormous lifetime debt?
Of course it is. The answer is to get it paid off as quickly as possible. And luckily, there are a few easy ways to do this.
Go for a shorter term
This one’s obvious. But for some reason, many borrowers think 25 years is the only length for a mortgage. Not the case. You can choose virtually any term below (and in some cases, above) 25 years to pay off your mortgage early. The best way to do this is to find out the maximum you can afford to pay and work backwards using a mortgage calculator. Here’s a quick example of how much you’d save by choosing a shorter term when you arrange your first mortgage:
You owe £200,000. Your mortgage is 3%. Over 25 years, you pay £948 per month with a total payment of £284,478. Go for 20 years, and your monthly payments change to £1,109 making a total payment of £266,169. Over 15 years, the figures are £1,381 per month and a total of £248,583.
So by paying the £200,000 mortgage off over 15 years rather than 25, you save £35,895.
Pay it off early
Of course, the other way to pay off your mortgage early is to agree to a longer term when you arrange, but pay it off quicker once you’re up and running. Most people’s financial situations change over the years, usually for the better. This means that a few years after signing up, chances are you’ll have some extra disposable dosh.
If you’re being mega-astute, this extra would be best put to work chipping away at your mortgage balance. Most mortgages allow you to overpay by a certain amount each year, without charge. Generally, that’s about 10% of your balance. If you pay more than that, you’ll probably be liable for an early repayment charge. Be wary of these. They are built in by lenders to discourage early repayment and maximise their return. Fees for paying too much normally range between 1% and 5% of the amount overpaid depending on your mortgage. Read the small print and do your maths. However, if you work within the limits you’ll still find overpaying reaps big savings. You’ll be surprised at how much just as little as £60 extra a month can save you:
With £150,000 outstanding on your first mortgage with a rate of 3% that has 25 years left, your monthly payment will be will be around £710 and total cost over the term will add up to £213,000. That means you’ll have paid the lender £63,000 in interest when you’re done. But if you paid an extra £60 each month, you’d reduce the time taken to pay the mortgage off by two years and nine months and make a total payment of £205,668, saving £7,332 in interest. That’s a serious amount considering you’ve paid just over £2 a day (the price of a coffee) extra. Think about that next time you’re paying for your morning latte and find a good mortgage broker to discuss the finer details of your mortgage.
Use your savings
There’s not much point having savings squirrelled away earning you a small amount of interest while you also have a debt that’s costing you more. So it makes sense to use any savings you have to pay off your mortgage early and reduce the amount of debt and the interest you pay on it, as this will be making up the bulk of your repayments. This makes a lot of sense in times when interest rates on savings is barely worth having. Like right now, for example. So rather than sitting on that cash for a rainy tomorrow, use it to bring some sunshine to your life today. Here are a few figures to show you what a bright idea that can be.
You have a £150,000 mortgage debt at 3.5% and 25 years left on your term. Your payments will be around £750 per month.
But hang on, you’ve managed to save £5,000 over the years and it’s earning you a steady 2.5% interest. Put that into your mortgage and you’ll pay your mortgage off one year and three months earlier without doing a thing – that’s 15 payments of £750 which totals £11,250. If you had left it in the bank for 25 years at the same rate, it would be worth £9,335.
Of course, you may want the reassurance of having some emergency money safely saved away, which is fine. It could actually be costing you money to do this however and any hard-headed accountant would tell you to use it to reduce your debt.
You could also go for an offset mortgage if you have a decent amount in savings.
With these, you place your savings in a savings account which is linked to your mortgage account. Your savings are then ‘offset’ against your mortgage debt, reducing the amount on which you have to pay interest.
One last thing. When it comes to using your savings to pay off debts, we would always recommend getting rid of the most expensive ones, such as personal loans and credit cards, first.
Be wary of repayment penalties. These are built in by lenders to discourage early repayment and maximise their return. Read the small print and do your maths. Depending on where you are in your mortgage term, it could actually cost you more to pay it off early.