These days, you pay more for debt than you earn in savings. Getting out of the red should be the first target of any savings and investment plan. So, why not apply that thinking by planning to pay off your mortgage early?
Mortgages can be such huge, long-term debts that it can be hard to imagine clearing them. Interest rates are typically much lower on mortgages than on other types of loans too, so we’re tempted to prioritise expensive debts like credit cards first.
But paying off a mortgage early can save tens of thousands of pounds, as well as giving you freedom and security to plan your finances… and your life.
Read our guide to paying off your mortgage in double-quick time:
- Should I pay off my mortgage early?
- Does my mortgage allow overpayments?insur
- How to reduce your outgoings
- How to increase your income
- Using savings to pay off a mortgage
- Offset mortgages
- Remortgage to find the right deal
- Try our mortgage calculator
If you’ve cleared other, more expensive debt – such as credit cards and loans – it’s time to start thinking about paying down your mortgage. Even if you’re still working towards clearing your credit cards in full, consider overpaying your mortgage as soon as you’ve made a significant dent in your credit card repayments. The long-term gains are likely to offset the short-term cost.
Typical mortgages last for 25 years, although many much longer terms are now available. A longer deal results in reduced monthly payments. However, the total amount of interest you pay over the entire length of the term increases significantly. For example:
- A mortgage of £100,000 at 6% paid off over 25 years would cost £193,200
- A mortgage of £100,000 at 6% paid off over 15 years would cost £151,920
What’s more, reducing mortgage debt can make you eligible for better deals when you come to remortgage – creating a virtuous circle by freeing up more of your money to reduce the debt even further.
If you’ve decided you want to pay off your mortgage, the next step is to check the terms and conditions of your current deal. Over-payments may not be allowed. There may also be a significant charge if you repay the mortgage early.
Limitations on over-payments apply to fixed-rate mortgages when you’re in the time-limited, fixed-rate period.
Even so, you may be allowed to overpay a certain amount without penalty – 10% of the entire debt in a year is typical.
The only way to know for sure is to check the paperwork, or speak to your provider. If you find restrictions on over-payments or early repayment, remember that these will probably end when the fixed-rate period ends. Get that date in your diary.
When your fixed rate finishes, shop around. Speak to a mortgage advisor to find a good deal. They’ll help you remortgage to shave points off your interest rate and reduce the length of your term, too. If you can afford to pay more per month, this really helps when finding a remortgage deal, too.
If your deal does allow you to pay down your mortgage, it’s time to start thinking about how you find the funds to do it…
We’re all about saving dosh at Money Magpie and there are innumerable ways to do it. Get started with our 50 top tips for day-to-day saving.
For those eager to get started on saving cash, try these four big-hitting ideas:
Cut the cost of insurance
We all need insurance and know how important it can be, but we also hate paying for it…
Insurers make their profits from customers who stay loyal to them and don’t shop around.
Save on your broadband and energy bills
As with insurance, there are major savings to be made on both your broadband and energy bills by simply shopping around for the right deal at the right price. Use our broadband comparison tool and our energy bill tool to find out if you could save hundreds of pounds a year by switching providers.
Get some freebies
What better way to save than to get stuff for free? Check out our competitions and freebies section to find hot tips on ways to get stuff for free. Remember to sign up to our newsletter, too – we’ll send you the best freebie offers every week!
Have fun on the cheap
Budgeting doesn’t mean you can’t have fun – there are lots of ways to have a good time without the big price tag. Go out for dinner for less with OpenTable and read our guide to eating out on the cheap.
While reducing outgoings is more important than increasing income, there’s nothing to stop you doing both. It’s surprisingly simple to tap into your inner entrepreneur.
Try our guide to easy ways to make money, or – if you’re eager to get going – start with these three big-hitting ideas.
Make money from your house
What better way to pay off your mortgage than by making the property pay for itself?
If you’re looking for something more short term, why not get involved with the gig economy by offering your room as a lodging through Airbnb?
Your spare room doesn’t have to be filled with people – you can rent it out as storage space through companies such as Storemates.
Make money in your spare time
There are all sorts of ways to make money in your spare time with options to suit almost any circumstance.
For example, you could do some mystery shopping on the weekend, or complete online surveys for companies like Toluna.
Creative types may want to try their hand at selling their skills. That could be anything from homemade cosmetics, to selling their photos to stock photography websites, or making their way as a freelance writer.
Fancy yourself as a host? Why not hold a product party at your home? Or, if your culinary skills are up to it, you could even set up a pop-up restaurant in your front room.
Recycle for profit
You can do your bit for the environment and make some money while you’re at it.
Don’t chuck out old mobile phones – recycle them and find the company that will give you the most cash.
Another way to reduce your clutter while earning money is to sell stuff on eBay. You could end up making hundreds from things that are just lying at the back of cupboards.
While it’s possible to find savings or investments that pay higher interest than the rate charged on your mortgage debt, this is unlikely to be easy. At best, you’ll find a savings rate that matches your mortgage rate. So, money sitting in a savings account could be put to use to clear your mortgage faster.
When making your calculations, you also need to remember that interest rates on both savings and mortgages are subject to change, and that paying down mortgage debt can help you access better deals when you remortgage.
Many people like to keep a rainy-day savings fund – if you do, use our service to compare easy access savings accounts.
However, instead of having a huge fund that’s just sitting there doing nothing, use any surplus above your emergency fund amount to pay off your mortgage early. You might feel a little strange spending your savings like this – but in return, you’re on your way to owning property outright. That’s a really strong financial position to be in – so it’s a good thing to aim for!
One way to retain the benefits of an emergency savings fund, while using your cash reserves to pay down your property debt is to consider an offset mortgage (sometimes referred to as a flexible mortgage).
With such an account, the daily level of your savings are considered when calculating the level of your mortgage debt. This is used to determine the amount of interest you pay. In other words, the savings are offset against the debt.
Options are also available to offset current account balances. This is something that may suit those who regularly keep high balances in their current account.
Offset mortgages are very flexible, replicating an emergency savings fund by allowing you to borrow back some of the over-payments you’ve made.
If handled in the right way, an offset account can help you pay off your mortgage much more quickly and cheaply than you would with an ordinary deal. However, there are negatives to consider.
Fees on offset accounts can be higher than on standard mortgages, while the financially undisciplined may find that the flexibility encourages them to repeatedly ‘borrow back’ available funds, lengthening the period of debt and increasing the interest they pay.
As with most areas of personal finance, shopping around to find the right deal is the key to saving money.
This applies to mortgaging and remortgaging, although the complexities means that particular care is needed, taking into account things such as:
- Whether you’ll be charged a penalty for switching mortgages
- Mortgage fees
- Interest rates
- Whether you want a fixed, discounted or tracker-rate deal
- If an offset mortgage is suitable
To help you with all such questions, Money Magpie has teamed up with London & Country, one of the best independent brokers in the UK.
To guide you through the mortgage maze, you can speak to one of London & Country’s expert mortgage advisers for free, and with no obligation.
If you’re not quite ready to speak to an expert adviser, why not crunch some numbers using our free and easy mortgage calculator?
You may be surprised by how much you can save by overpaying and finding the right deal…