How to pay off your mortgage early
Today marks the day that we have earned enough to cover mortgage repayments for a year. But how do you go about paying off your mortgage sooner?
Halifax has declared today, the 13th of April, to be UK Mortgage Freedom Day.
Research from the bank shows that today, the 103rd day of the New Year, UK homeowners will have earned enough to cover their annual mortgage bill.%VIRTUAL-SkimlinksPromo%
The bill works out as £6,597 for most people and those earning an average of £23,450 a year could pay it off if everything they earned from January 1st until today was dedicated to their mortgages. So an unlikely situation for most!
But what other realistic ways can you break free of the shackles of a mortgage and pay it off earlier?
Before you set about trying to pay your mortgage off early you should make sure it's the right move.
If you have credit and store cards, these usually have interest rates that are much higher than mortgages, so it's worth clearing these first. You can take out a 0% balance transfer card to get rid of this debt sooner.
You might also want to think about contributing to a pension scheme instead of paying back your mortgage early. Pensions are a tax-efficient way to save as the Government will top-up whatever you put in with tax relief.
Save and boost income
Paying off your mortgage early revolves around having extra money to play around with, so it is important you have some savings or can build some up.
The first place to start looking for ways to save money is your expenses. You can use Lovemoney's MoneyTrack tool to analyse what you spend and where to find ways to cut down. It might mean making your own lunches or walking to work - any changes you make will add up.
After you've established where you can save, you can try to earn a bit extra to get a boost. There are plenty of ways you can do this like selling your old items, using a skill, taking on extra work, entering competitions, switching to better deals on bills or even taking in a lodger.
Check out How to sell successfully on eBay, How to make money in the evening and Rent A Room scheme: tax-free cash from your spare room for more.
Shorten your term
Most bog-standard mortgages last for 25 years, but if you are able to shorten the term you can finish paying it off sooner and pay less interest overall.
The downside is that your monthly repayments will balloon.
For example, on a £150,000 mortgage with a rate of 5% taken out over 25 years, you will pay £877 a month assuming the rate stays the same for the term. Shortening the term to 20 years will make your monthly repayments shoot up to £990 a month
But if you can afford it you will save £25,482 in interest.
Overpaying is another great way to be free of your mortgage debt earlier.
You can do this in lump payments or every month depending on what you have available and how your lender charges interest. If your home loan accrues interest daily then you should overpay whenever you have the funds, but if it is annually you will need to time it right.
If you get it right you can pay your mortgage back much earlier.
For example, if you had a £150,000 mortgage with 25 years on the clock with a rate that remained at 5% for the term, your monthly payments would be £877. But if you chose to overpay your mortgage by £150 each month you could shave six years and three months off your term and save £31,616 in interest.
Most mortgages allow you to pay back up to a tenth (10%) of the amount outstanding without any early repayment charges, but you will need to check with your provider to be sure of exactly what's allowed.
Get an offset mortgage
Another way you can pay your mortgage off early is with an offset mortgage.
These work by linking a savings account with your mortgage deal. Any money you put into the savings account is taken off the outstanding mortgage balance – meaning you are charged less interest. So instead of earning interest on your savings you pay less on your mortgage debt.
So if you had a £150,000 home loan but had £10,000 in a linked savings account you would only pay interest on £140,000 of that debt.
Your money can sit in a savings account and allow you to make lower monthly repayments on the mortgage, but if you maintain the higher repayments you are effectively overpaying and shedding years off your term.
Another great thing about an offset mortgage is that if you need the savings you have built up you have easy access to them. It is tougher to get back any overpayments on other mortgages and doing so is at the discretion of your lender.
Also this type of deal is particularly beneficial to higher rate tax payers as they can save 40% in tax on their savings if they use it to "save" with an offset mortgage.
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At Lovemoney, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free Lovemoney broker. Call 0800 804 8045 or email email@example.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at Lovemoney), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.