You can pay off your mortgage quicker than you think. There’s no law that says you have to take 25 years to pay it. The quicker you pay off your mortgage the more money you save and the quicker you have your freedom. Check our mortgage tips here.
A mortgage is like any other kind of debt. Really, you are renting the money, so the longer you take to pay it off, the more it will cost you. Mortgages are the biggest kind of debt in our lives so we can save thousands of pounds by paying them off quicker.
For example, if you took out a mortgage of £100,000 at 6% and paid it off over 25 years it would cost you altogether £193,200 (a scary figure in itself). However, if you paid it off over 15 years it would cost you in total £151,920 because you have ‘rented’ the money for less time. That’s a saving of £41,280!
Of course, if you pay it off over a shorter time you have to pay more each month, but if you can afford that then it is definitely worth doing. You can even arrange with your mortgage provider to pay off extra chunks during the year as and when extra money comes in. That’s the best thing to do with a mortgage that calculates interest daily, as any money you put in will have an immediate affect on the amount of interest you pay.
If you pay off your mortgage quickly it doubles up as a tax-free form of investing. If you have some extra money to invest you could put it into a savings account. But, unless you put it in a cash Isa, you would have to pay tax on any interest you make. However, if you put that money towards paying off your mortgage you won’t be taxed on it as the Inland Revenue doesn’t think of it as investing, they think of it as paying off a debt. So you would save the whole amount.
Do be careful
Some mortgages (typically fixed-rate mortgages) don’t allow you to pay them off quicker while they are in the fixed period. Some allow you to pay around 10% of the debt each year but not much more. Remember that mortgage lenders want you to pay off your debt as slowly as possible so they can make as much money from the interest as possible. It is worth checking that there are no penalties if you decide to make an extra/higher repayment.
If there are penalties, but you are able to save extra money each month, then put this cash in a high-interest savings account while you’re in the fixed period. When your fixed rate period ends pay off a lump off the capital (the actual amount you have borrowed) then. You could also then consider switching over to a flexible mortgage which will allow you to pay back extra without penalties after that.
It is actually fairly straightforward to pay off your mortgage quickly – not easy necessarily, but certainly straightforward. Put simply, the best way to do it is to spend less, earn more, then make the most of the money you save by either putting it towards your mortgage – or placing it into a high-interest savings account if you have a fixed-rate deal.
Saving money doesn’t have to mean making huge sacrifices. There are plenty of little changes you can make that won’t badly affect your lifestyle but will positively affect your bank balance. So here is our step-by-step guide to reducing your outgoings and increasing your income. It’ll help you decide what to do with all that money!
There are tons of things you can do to save money. First of all make sure you don’t spend more than you need. A great source of advice is our 50 top tips for day-to-day saving which will show you how to cut costs in pretty much every aspect of your life. Never pay full price for things if you can help it. You could also see here for our article on reducing your outgoings.
All those savings are a great start, but now it’s time to make some money. Once again this is much simpler than you think it is. Start with our easy ways to make money now, then read on for more money-making ideas.
Any money you have left over each month can either be put towards your mortgage (if yours is flexible enough) or, if you have a fixed mortgage and are only allowed to pay off, say, 10% of the capital each year, then pay that and then put the rest into a high-interest savings account.
Don’t forget that you can put up to £15,000 into a cash ISA – which is basically a savings account that you don’t pay tax on. This means that when you get your interest on the money you don’t lose any of it in dreaded tax payments. Read our full article on how to choose the best cash Isa.
Once you’re out of your fixed-mortgage period you can put everything you’ve managed to save into your mortgage and get yourself a new flexible mortgage. A flexible mortgage allows you to overpay, so you can use your savings to make a real dent on your mortgage.
Talk for free to London & Country – one of the best independent brokers in the UK – and find out whether you would be better with a flexible deal or if you should still go for a fixed rate. With flexible mortgages the interest is calculated daily, so any extra cash you pay will reduce the interest straight away and you can get rid of your debt much quicker.
Get an offset mortgage. These can be a great way to pay off your mortgage faster. They work by taking into account your savings when the mortgage company calculates the interest you need to pay on your loan. So they ‘offset’ the savings you have against your mortgage.
Similarly, in a current account mortgage all the money in your current account is offset against the money in your mortgage. So, if you regularly have a high balance in your account and you have some significant savings it could be worth going for an offset or current account mortgage.
Your savings are linked to your mortgage account and used to reduce your balance. The interest rate is calculated daily, so having the savings sitting there will help to reduce your mortgage. Let’s simplify things – if you have a mortgage of £100,000 and savings of £20,000 your debt will be calculated as £80,000 instead. You will still pay the same amount each month, but more of that payment will go towards paying off the actual debt (the capital) than just paying the interest. Oh, and once again, you won’t be paying any tax on the reduced interest you pay!
So the good thing about offset mortgages are that a) they help you pay off your mortgage quicker and cheaper, and b) they are very flexible – so that if you wanted to borrow back some of the money you have paid in, you can.
However, if you are not a disciplined person, offset mortgages can be a nightmare because you could find yourself constantly dipping into the money you have paid off and borrowing it back to buy nice things. You could have your mortgage for years and never pay it off. So, be kind to yourself. If you know you wouldn’t have the discipline not to give into temptation then don’t get an offset or other flexible mortgage, get something that forces you to pay the money off and won’t give you any choice!
If you’re coming to the end of a fixed-rate mortgage period – start looking now for a new deal. Get yourself a broker to help the process along. Moneymagpie has teamed up with London & Country; one of the best independent brokers in the UK. You can speak to them for free about your mortgage needs. You don’t have to buy then and there but the sooner you do some research the easier it will be to find out which mortgage deal is right for you.
Work out where you’d stand with different mortgage arrangements by using a mortgage calculator.