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Being mortgage free sounds like a pipedream. But if you really put your mind (and money) to it, you can get it paid off much earlier than planned.
When interest rates and returns on savings are low it makes sense to plough money into paying off your biggest debt. Not only will you own your home outright and stop having to make monthly mortgage payments, you will save thousands of pounds in interest too.
There are many ways to pay off your mortgage faster. Do your research and pick the one that is most suitable for you and your financial circumstances. Here are my tips for being mortage-free sooner.
1. Overpay each month
Chip away at your mortgage balance with a little extra each month. Even £50 a month can make a difference.
Say you have a £150,000 mortgage taken out over a 25-year period, with an interest rate of 3%. Overpaying by £50 a month could save you a healthy £6,548 in interest and your mortgage would be paid off 2 years and 3 months early, according to calculations by L&C Mortgages, the fee-free broker.
Overpaying by £100 a month could save you a healthy £11,843 and knock 4 years and 2 months off the life of your home loan.
Most mortgages allow you to ‘overpay’ by a certain amount each year, without charge. It’s typically 10% of your mortgage balance. If you pay more than that, then you may have to stump up an Early Repayment Charge.
However, there is nothing to stop you doing that and setting up a savings account on the side if you do have more to spare than your lender will allow you to overpay by. Put those savings into your mortgage at the end of the fixed rate.
You might not feel you have an extra £50 to spare each month. But by going through your expenditure, you may be able to identify some spending that you can trim. Cutting back on takeaways and expensive coffee shops could be all it takes.
If you overpay on an offset loan (see below) – you’ll pay off your mortgage faster still.
2. Use an offset mortgage
This is a unique type of home loan, where savings are offset against the debt, with interest charged only on the difference.
The mortgage is paid off earlier as you pay less interest. You’ll still have access to your savings whenever you need them. The more you add to your savings pot, the further you will reduce the mortgage debt that you have to pay interest on.
When savings rates are lower than mortgage rates – as is the case today - it’s the way to go.
The bigger your savings pot, the more money you save on interest - and the quicker you pay off the loan.
If you had £10,000 in savings, and offset it against a £150,000 25-year mortgage at 3% would save £10,426 in interest and see the mortgage repaid 1 year 1 month early, according to L&C Mortgages.
Offsetting £20,000 against the same mortgage would save £19,486 in interest and see the mortgage repaid 2 years 2 months early.
Offset mortgages are offered by lenders including Barclays, Scottish Widows Bank, First Direct, Yorkshire Building Society and Coventry Building Society.
Traditionally they were much more expensive than standard loans. But the margin today is much smaller with offsets priced much closer to mainstream mortgages.
3. Switch to a cheaper deal
The less interest you pay, the quicker you could pay off the actual loan. So if you’re one of the 4 million people on their lender’s standard variable rate (SVR), you could definitely save money by remortgaging.
The average SVR is currently 4.71% according to Moneyfacts.co.uk. Monthly repayments at 4.71% on £150,000 25 year mortgage would come to £851.73, say L&C Mortgages.
By bagging a 5 year fixed rate mortgage at 1.79%, the monthly payment would be slashed to £620.56.
Assuming that rate could be achieved throughout, maintaining monthly payments at the higher level would save £81,373 compared to staying on SVR throughout and the mortgage would be repaid 7 years 10 months early.
If you have enough equity in your home now could be a very good time to switch as there are many good mortgage deals on the market for those who don’t want to borrow a high loan-to-value. Even if your current mortgage rate isn’t due to expire for a few months, a mortgage offer can be valid for up to six months so it’s a good idea to bag a cheap rate before interest rates start climbing again in the new year.
4. Shorten the repayment term
The shorter the term of your mortgage, the less interest you pay overall. Lenders use a standard repayment term of 25 years. But this isn’t set in stone. So long as you can afford higher monthly repayments you can, in fact, take out a mortgage for as little as five years.
On a £150,000 mortgage at 3% over 25 years monthly repayments would cost £711.32. To finish paying off your mortgage 10 years early and changing the term to 15 years, repayments would rise to £1,035.87.
Be careful not to get carried away with the dream of clearing your mortgage and ensure you set repayments at a level you can comfortably afford.
If you feel comfortable committing to higher monthly repayments and would prefer some flexibility in how you repay, overpaying or offsetting could be a better option.
5. Pay in any financial windfalls
If you get a large bonus or inheritance - or perhaps a few numbers come up on the lottery - you could use the money to pay off a chunk of your mortgage. If you reduce the £150,000 mortgage to £125,000 that would reduce the monthly payments at 3% over 25 years from £711.32 to £592.76, according to L&C.
If you continued to (over) pay the £118.56 difference then you could save a further £12,992 in interest and shave 5 years 7 months off the term.
For those on a fixed rate this will only be possible when the deal expires to avoid Early Repayment charges.
The Money Advice Service provides a wealth of useful information about mortgages and other financial topics, including debt, on its website.
Although a mortgage is one of the biggest debts you’re ever likely to have, it isn’t the most expensive.
Unsecured debts such as credit cards, personal loans and especially store cards, have a much higher rate of interest on them. Recent research by Moneyfacts.co.uk showed that the average interest rate on credit cards is 23%.
So if you have debts with those types of credit you’ll be paying much more in interest, and it makes better sense to pay off these more expensive debts before you start paying down your mortgage.
Equally, don’t leave yourself without any emergency savings. While it’s tempting to plough every penny into paying off your mortgage you want to make sure you have money in the bank if the boiler packs up.
If you really put your mind (and money) to it, you can get your mortgage paid off much earlier than planned