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Category: Mortgages Date: 2/21/2012
Paying off your mortgage early is a sensible thing to be considering at the moment.
The great thing is that even a small change can make a big difference to your mortgage balance.
Repay expensive debts before your mortgage Make your savings work harder Option 1 – shorten your mortgage term Option 2 – make overpayments Option 3 – offset mortgages Should you overpay or offset?
Just £50 extra per month could shave a significant amount off the term of your mortgage so that (depending on the size of your mortgage and how much you overpay) you could finish months, or even years earlier!
Expensive credit card, overdraft, store card and catalogue debt is better repaid before your mortgage because the interest rates will normally be higher.
If you are only repaying the minimum amount on a large credit card balance you'd be surprised how long it can take to pay off – we can be talking decades! So repay expensive debt before looking to pay off your mortgage.
Transferring costly balances onto a new 0% balance transfer credit card is a good place to start as it can help you make a significant in-road into your debt.
If the mortgage rate you are paying is more than the rate you are receiving on your savings (after tax), you will save more by repaying your mortgage than you would receive in savings interest.
Savings Interest (after tax) earned at 2.00% in one year
Mortgage Interest paid at 4.00% in one year
£2,500
£50
£100
£5,000
£200
£10,000
£400
£15,000
£300
£600
£20,000
£800
All calculations assume that interest is calculated and applied annually. Mortgage interest figures are maximums based on what you could pay on an Interest Only Mortgage.
The shorter the term of your mortgage, the less interest you pay. Your existing mortgage lender may allow you to reduce your term, or you could remortgage.
The side effect of a shorter term will be higher monthly repayments. Be careful not to cripple yourself with your mortgage payment by only setting it at a level you can comfortably afford.
If you don't want to commit to a higher payment, and would like some flexibility in how you repay, maybe overpaying or offsetting is a better option.
However, if you're not very disciplined a shorter term is the safest and surest way to repaying your mortgage early.
Most mortgages will allow you to make overpayments. An overpayment is an amount you can pay in addition to the contractual monthly payment on your mortgage.
You can usually do this on the same direct debit as your mortgage, or by paying off a lump sum. If you are paying off a large amount, particularly if you're on a fixed rate, there will probably be a limit you can overpay (typically 10% of the loan amount) after which there will be an Early Repayment Charge.
Should you overpay or offset?
Another option is the offset mortgage. This works by having a savings account linked to your mortgage. Monies placed into the savings account are "taken off" the mortgage balance – meaning you are only charged interest on the mortgage balance minus your savings balance, which saves you mortgage interest.
Usually you can choose whether to have this saving reflected in lower mortgage payments, or a shorter term. If you wanted you could then overpay and save even more money!
If you're coming to the end of a fixed rate that's going to go onto a cheaper variable rate, consider maintaining your payment at the same level. By doing this you won't notice any difference, but you'll be taking a big step to shrinking that mortgage balance!
Offsetting
Overpaying
Do I earn interest on my savings?
Not usually. Your money saves you mortgage interest instead.
No. Your money repays a portion of your mortgage balance – you save mortgage interest instead.
Are there any limits on how much I can put in without incurring an Early Repayment Charge?
Because you aren't physically repaying your mortgage, you don't have to pay any Early Repayment Charges.
There may be if you're in an initial rate period. If you can overpay, it's generally only up to 10%. You can overpay more, but you would face an Early Repayment Charge. After the initial rate period ends, there aren't usually any restrictions on how much you can overpay. If you are unsure, ask your lender before overpaying, or check section 11 of your Mortgage Offer for more details.
Can I withdraw my money easily?
Your savings remain separate to your mortgage and can be withdrawn as you wish. You may not have instant access to your savings depending on the account that is linked to the mortgage.
You may not be allowed to take your money out of your mortgage. Where you are allowed to "borrow back" this money it will be at the lender's discretion and might be subject to certain minimum withdrawal limits. If you are unsure, ask your lender before overpaying, or check section 12 of your Mortgage Offer for more details.
What compensation would I get if my mortgage lender goes bust?
The first £85,000 of your offset savings are covered by the Financial Services Compensation Scheme. Amounts above this aren't lost - instead they are used to pay off part of your mortgage balance.
Your overpayments will have reduced your mortgage balance, so although you wouldn't get any compensation, you would have less of a mortgage.
Do I need to remortgage?
If your current mortgage doesn't have an offset facility, you will need to remortgage to take advantage of offsetting your savings.
Not necessarily. Your current mortgage may allow overpayments – ask your lender or see section 11 of your Mortgage Offer for more information. If you have finished your initial rate period and have no Early Repayment Charges, you should be able to overpay – contact your lender for more details.
Do I pay tax on the interest I save on my mortgage?
You're not liable for any tax on interest you save on your mortgage. Although if you earn interest on your offset savings, you will have to pay tax on any interest earned.
no.
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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at anytime.