Many people work towards paying off their mortgage early for good reason. Not only can you reduce the overall cost of your mortgage but you can also benefit from owning your home outright sooner. But what’s the best strategy for paying off your mortgage? And is it always the right thing to aim for or are there some drawbacks? There are some important considerations to bear in mind before committing your hard-earned money to paying off your mortgage early. In this guide, we’ll explain how to pay off your mortgage faster, what the pros and cons are, what you should prioritise over paying off your mortgage, and what other options you have to save money on your mortgage.
How Do I Pay off My Mortgage Faster?
Paying off your mortgage faster can significantly reduce the total amount of interest you pay over the long term. If you’ve decided that paying off your mortgage early is something you want to aim for, there are various ways you may go about it. You may want to choose one of these strategies or a combination. Let’s have a look at the best ways to pay off your mortgage early below.
Overpay Your Mortgage
Overpaying your mortgage is one of the most common ways to pay off your mortgage early and decrease the overall cost of your loan. There are two ways you can overpay your mortgage, you can either increase your monthly repayments or make a lump sum overpayment. Even a small increase to your monthly repayment can make a big difference over the life of your mortgage, so if you can afford it, this may be a more manageable approach.
It’s important you check what overpayment limits and charges may apply to your specific mortgage deal before going down this route. Most lenders limit the amount you can overpay each year to 10% to 20% of your remaining balance. If you go over the limit, you may be required to pay an Early Repayment Charge. You can check the specific terms of your mortgage deal by looking at your contract or speaking with your broker or lender.
Shorten Your Mortgage Term
How long you have left to pay off your mortgage is known as your mortgage term. You may be able to change your mortgage term by speaking to your lender or by remortgaging. Reducing the term of your mortgage means you’ll pay off your mortgage faster and pay less interest overall – but your monthly repayments will likely increase.
Shortening your mortgage term effectively provides the same outcome as overpaying your mortgage on a monthly basis. Although both these strategies produce the same result, you may be better off overpaying your mortgage because this gives you more flexibility. This is because overpaying is controlled entirely by you, whereas the term of your mortgage is controlled by your lender. So if you ever need to stop overpaying you can, but if you need to reinstate your original term, you’ll have to ask your lender and hope they allow you to.
Strategies For Overpaying Your Mortgage
As mentioned, the best way to pay off your mortgage early is usually by making overpayments. Here are a few approaches that can make overpayments more manageable and predictable.
- The ‘extra month’ plan. This is where you pay an extra month’s repayment each year. You can either do this as a one-off lump sum each year or by increasing your monthly repayments by 1/12. So if your monthly repayment is £1200, you can either pay an extra £1200 each year as a lump sum or increase your monthly repayments to £1300.
- The ‘pound a month’ plan. This is where you increase your repayments by £1 each month. This strategy assumes that your income will gradually increase over time. It may not seem like much at the beginning, but over time, you’ll be overpaying your mortgage quite considerably and you’ll pay off your mortgage many years earlier.
- Round up your repayments. This is where you round up your monthly repayments to the nearest hundred. So if your repayment is £935, you would round it up to £1000.
- Put unexpected income towards your mortgage. This is where you use windfalls like bonuses or inheritances to make lump sum overpayments on your mortgage.
What are the Advantages of Paying off My Mortgage?
Paying off your mortgage early can offer significant benefits. Let’s have a look at some of the advantages of paying off your mortgage below.
- Reduces the cost of your mortgage. Perhaps the greatest advantage of paying off your mortgage sooner is that you’ll pay less interest overall. This will typically save you many thousands of pounds over the life of your mortgage.
- Increases your financial security. Owning your home outright can make your financial position much more stable and secure. This can reduce stress and anxiety as you approach retirement, and allow you more financial freedom and disposable income in later life.
- May improve your credit score. While not a direct impact, owning your home outright can positively influence your credit score over time.
It’s essential to weigh these advantages against other financial priorities, such as building an emergency fund or saving for retirement. We’ll discuss this further in the following section when we look at the disadvantages of paying off your mortgage early.
What are the Disadvantages of Paying off My Mortgage?
We often hear about the benefits of paying off a mortgage early, but there are some potential drawbacks to consider as well. Let’s have a look at some of the disadvantages of paying off your mortgage below.
- Opportunity cost. The money used to overpay your mortgage could be invested elsewhere, potentially earning a higher return. This is often difficult to gauge, as returns on stocks and shares, rental property, and other investments fluctuate over time. Comparing potential investment returns to mortgage interest rates is a good place to start, but you may want to speak to a financial advisor to make a more detailed plan. You may want to overpay your mortgage whilst also investing if you can afford to do both.
- Reduced liquidity and savings. Tying up large sums of money in your mortgage means you’ll have less cash available for emergencies or other opportunities. It may also make it more difficult to save for retirement and reduce your ability to take advantage of tax-efficient investment vehicles such as pensions and ISAs.
- Early Repayment Charges (ERCs). Depending on how much you overpay your mortgage, you may be liable to substantial Early Repayment Charges. However, most deals allow you to overpay your mortgage by 10% to 20% a year without being liable for an ERC. Find out more about ERCs by reading our guide, ‘What is an Early Repayment Charge and When Do I Have to Pay It?’
It’s important to weigh up these factors carefully before deciding whether to work towards paying off your mortgage early. Consulting with a financial advisor can help you make an informed decision based on your individual circumstances.
Should I Pay off My Mortgage Early?
Some people believe that the sooner they can pay off their mortgage the better. This view is valid, as paying off your mortgage early means you’ll pay less interest overall and enjoy the security of owning your home outright sooner.
However, whether you should pay off your mortgage early or not depends on your specific situation. Let’s have a look at some important considerations to make when deciding whether to overpay your mortgage.
- How high is your interest rate? If your mortgage interest rate is high, paying off your loan early could save you substantial amounts in interest. However, if your rate is low, the savings might be less significant.
- Do you have other more expensive debts? Credit card debts and personal loans are generally more expensive than mortgages. You may want to prioritise paying off your most expensive debts first.
- Do you have a sufficient emergency fund? Having an emergency fund is crucial in case you lose your job or hit hard times. It’s generally recommended that you have enough to last 3 to 6 months in an easily accessible savings account before overpaying your mortgage.
- Are you saving into a pension? Paying off your mortgage early at the expense of retirement savings could have long-term consequences. Ensure you factor in adequate retirement savings when working out how much to overpay your mortgage.
- What are your overpayment limits? Check if your mortgage has an Early Repayment Charge and at what point you’ll be liable for it. You may want to overpay within your limits to maximise the benefits of paying off your mortgage early.
- Could your money work harder elsewhere? Consider the potential returns and tax incentives of other investments and compare them to what you’d save by overpaying your mortgage. A financial advisor will be able to help guide you in this area.
What Other Ways Can I Save Money on My Mortgage?
Let’s have a quick look at a couple of ways to reduce the cost of your mortgage without overpaying.
Remortgaging
Remortgaging to a better deal is one of the most common ways to save money on your mortgage. If you’re currently on a Standard Variable Rate mortgage, or if mortgage rates have decreased since you took out your current deal, you may able to save money by remortgaging to a lower rate. Also, if you’ve built up more equity in your home, your lower loan-to-value ratio may mean you’re now eligible for better deals. Find out what rates are available to you by speaking to one of our friendly mortgage advisors or learn more about remortgaging here.
Offset Mortgages
Offset Mortgages produce similar benefits to overpaying your mortgage but without having to lock away your savings for good. Instead, you deposit the money into a linked bank account with the lender, who’ll then deduct interest from your monthly repayment. This means you can save money on your mortgage whilst still having access to your savings if you need them. To find out more about Offset Mortgages, please read our guide, ‘Offset Mortgages – Could You Save Money on Your Mortgage?’
For more information about reducing the cost of your mortgage, please read our guide, ‘How Can I Save Money on My Mortgage?’
The Bottom Line
Paying off your mortgage early can considerably reduce the amount of interest you pay overall and increase your financial freedom by owning your home outright sooner. However, it isn’t the be-all and end-all and shouldn’t be prioritised over having an emergency fund, paying off other more expensive debts, or saving for retirement. You may also want to consider investing instead of or alongside overpaying your mortgage, especially if your predicted returns are higher than the interest you’d expect to save. If you do decide to pay off your mortgage early, the best way is typically to overpay. You can either do this as lump sums or by increasing your monthly repayments, but if you exceed your lender’s annual limits you may be liable for an Early Repayment Charge. If you want to use savings to reduce the cost of your mortgage whilst still having access to the money, you may want to consider an Offset Mortgage instead of overpaying. Or you may be able to switch to a cheaper traditional mortgage deal to save money. You can find out what rates are available to you by booking a chat with one of our friendly advisors.
At Michael Usher Mortgage Services, we’ve been helping people throughout Surrey, Hampshire and Berkshire for over 30 years! We’re not affiliated with any particular lender, so we can access a comprehensive range of mortgages from across the market to find a deal that suits your needs. We’ll guide you through the process and liaise with your lender, estate agent and solicitor to ensure your application goes as smoothly as possible, and we can also help to protect your mortgage with our FREE Insurance Service.
Talk to one of our friendly mortgage advisors for free to get going quickly. Our head office is on Frimley High Street, but we can also help you remotely via phone or video call if you’d prefer. We look forward to chatting with you!
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Your home may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The precise amount will depend on your circumstances but will be agreed with you before proceeding.
