Paying your mortgage off earlier than expected could be one of the biggest investments you ever make.
You can be rid of your biggest debt fast, free yourself from ties to the mercy of the varying property market and put all the money you are no longer paying out to better use.
Borrowing heavily made a lot of sense in a world of high inflation. Throughout periods of the seventies and eighties, for example, debt consistently eroded away as the value of money deteriorated. But in a world of low inflation – with current estimations at just 1.5% – debt pretty much stays as it is unless you act to reduce it.
Why should you overpay?
Let’s say you have a £100,000 mortgage taken out over a 25 year period, with an interest rate of 6%. If you overpay by £100 a month every month, it would save you a very healthy £26,892.54 and would knock six years and four months off your mortgage’s life.
Interest rates are at a low at the moment, with the Bank of England base rate still stuck at 0.5%. This means a lot of people on tracker or SRVs are paying a low mortgage rate. When rates are high, the savings made by overpaying are naturally more significant, but using the difference between a low and a hypothetical high interest rate as overpayments could, whilst psychologically being fairly acceptable, help clear that debt faster – before interest rates can actually rise high again.
For example: our borrower above at 6% has monthly repayments of £644, if their mortgage rate falls to 3% their new monthly repayments are £474.
If they overpaid by £100 a month they would save £10,730.94 and still pay less per month than before, knocking 5 years and 11 months off their mortgage!
What to watch out for
Some lenders give you a minimum amount which you can overpay. If you pay less than this, your money sits in the lender’s coffers until the end of the financial year, which means you are giving it an interest free-loan.
If you end up paying more than the minimum amount, your interest bills will usually be recalculated from the following month – making this the preferable alternative.
Some lenders offer flexible or ‘offset mortgages’ which recalculate your balance daily. This is to help you pay off your loan even faster and people can take advantage of this by paying extra each month and seeing their debt almost immediately erode away.
Watch out for charges
If you are on a fixed rate or a tracker, you may need to pay an early redemption penalty if you pay off your mortgage completely, or go beyond permitted overpayments. Always read the mortgage agreement carefully and plan ahead accordingly.
On some poor value mortgages, it can stretch for several years after the initial rate is over, making repayments in this situation unwise and expensive.
Neither should you repay some of your mortgage if you have heavy credit card debts on regular and high APRs – mortgage loans are still the cheapest around and it never makes sense to repay a mortgage at 6% if you have credit card debts requiring 15%-20%.
If you are committed to having a mortgage free life, discipline is the key. Of course, to be able to pay some off in lump sums you need to make cuts elsewhere, so be careful – you must make sure you have enough money to cover all your outgoings to prevent missing payments on your mortgage.
If you do go ahead with a mortgage on a new property purchase, do make sure you don’t jeopardise your ability to pay off the debt by overlooking a serious defect. A Chartered Surveyor can offer a number of services to fit any budget and make sure you are always fully aware of what you’re buying. Independent Chartered Surveyors can be accessed via the link below:
CW / SRJ 04.07.2014