Your mortgage is likely to be the biggest financial commitment that you’ll ever have. So, it’s no surprise that you might want to repay this debt as quickly as you can!
Paying off your mortgage early means you’ll own your home outright and it could save you thousands of pounds in interest. Here are four ways you can pay your mortgage off sooner.
1. Switch to a cheaper deal
Thousands of mortgage borrowers in the UK are currently paying their lender’s Standard Variable Rate (SVR). Research from Which? has found that homeowners sitting on their lender’s SVR could be paying up to £4,000 a year more than they need to.
Switching to a better mortgage deal can help you to reduce your repayments and/or shorten your mortgage term.
According to Moneyfacts, the current average SVR in the UK is 5.11%. On a £200,000 repayment mortgage over 25 years, your repayments would be around £1,182 per month.
If you were to remortgage to the best two-year fixed-rate deal currently available (1.44% with NatWest) the repayments on a £200,000 repayment mortgage over 25 years would be £794 per month.
By remortgaging, you’d save almost £400 per month. You could use this additional money to overpay on your mortgage, shortening the term and reducing the amount of total interest you would pay.
If you have equity in your home, then there are some excellent mortgage deals available. We’re remortgage experts and can help you find the right lender and product for you. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.
2. Make overpayments
If you have a little bit of spare cash left over every month, consider reducing your mortgage balance by making overpayments.
Here’s an example from the FSCS. If you have a £150,000 mortgage over 25 years at an interest rate of 3%, paying just £50 extra a month would save you more than £6,500 in interest and you’d pay off your mortgage more than two years early. Giving up a takeaway and a couple of cups a coffee each week could give you enough to make this overpayment.
If you overpay by £100 per month you could reduce your mortgage term by more than four years.
If you’re on a fixed, tracker or discounted variable rate, most lenders will let you overpay up to 10% of your mortgage balance each year without you having to pay an Early Repayment Charge (ERC). If you want to overpay by more than 10%, set up a savings account and repay a lump sum once your fixed or tracker period (and the accompanying ERCs) have ended.
If you’re not on a special rate, you will typically be able to overpay as much as you wish.
3. Shorten the term
Reducing your mortgage term reduces the amount of interest that you will pay overall. While many lenders use a standard repayment term of 25 years, you can choose the term of your mortgage.
If you took a £200,000 repayment mortgage over 25 years at an interest rate of 3%, you’d pay £948 per month. If you took the same mortgage over 20 years, your repayments would rise to £1,109.
Even if you took just a year off the term your repayments would only rise to £975 per month.
If you can afford to pay the higher amount, then consider shortening your mortgage term. When you come to remortgage (see above), it’s an ideal time to reconsider how many years you take your mortgage over.
4. Consider an offset mortgage
If you have savings, but you’re not sure whether you want to use them to reduce the balance of your home loan, you could consider an offset mortgage.
An offset mortgage links your savings account(s) to your mortgage. Any money that is in your savings account reduces your mortgage balance, and you only pay interest on this lower balance. You retain access to your savings, meaning you can access them whenever you need them.
The more you put into your savings account, the lower your mortgage balance. So, if you carry on making the same mortgage repayments, you’ll repay your loan sooner as you are essentially overpaying each month.
Figures published by the FSCS show that if you had a 25-year offset mortgage of £150,000 at a rate of 3% with £10,000 in a linked savings account, you would repay the 25-year mortgage one year and one month early, saving £10,426 in interest.
If you offset £20,000 against the same mortgage you would save £19,486 in interest and your mortgage would be repaid two years and two months early.
Many lenders offer offset mortgages, although you may pay a higher interest rate than you would on a traditional mortgage product.
…and one reason you might not want to overpay on your mortgage
Paying your mortgage off early might be important to you. And, using the methods above, you may be able to become mortgage-free sooner than you expected.
However, there’s one factor to consider if you’re thinking about making overpayments to your mortgage.
If you have other borrowing – a personal loan or credit card – then you may be paying a higher interest rate on this borrowing than you are on your mortgage. It’s not unusual for credit cards to charge upwards of 15% interest on balances.
If you do have other balances, it might be worth considering repaying these more expensive loans first before you start chipping away at your mortgage.