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How to pay off your mortgage early

How to pay off your mortgage early

Category: Mortgages
Author: Tim Leonard
Updated: 23/11/2018

Paying off your mortgage early is a sensible thing to consider.

The great thing is that even a small change can make a big difference to your overall mortgage balance. 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!

On this page:

  1. Repay expensive debts before your mortgage
  2. Make your savings work harder
  3. Shortening your mortgage term
  4. Making overpayments on your mortgage
  5. Offsetting your mortgage
  6. Should you overpay or offset?

1. Repay expensive debts before your mortgage

Before you start overpaying your mortgage, think about any other debts you have. Expensive credit card, overdraft, store card and catalogue debt is better repaid first, because the interest rates on these will normally be higher.

If you're 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, either by paying more than the minimum, or even by changing credit cards.

Transferring costly balances onto a new 0% balance transfer credit card could be a great place to start, as it can help you make significant in-roads into your debt.

2. Make your savings work harder

If the mortgage rate you're paying is more than the interest rate you're earning on your savings, as in the table below, you will save more by repaying your mortgage than you'd receive in savings interest. If you pay tax on your savings interest, the benefits of paying off your mortgage first are even greater.

Savings Balance Savings interest (gross) earned at 2.20% in one year Mortgage interest paid at 4.00% in one year
£2,500 £55 £100
£5,000 £110 £200
£10,000 £220 £400
£15,000 £330 £600
£20,000 £440 £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.

3. Shortening your mortgage term

The shorter the term of your mortgage, the less interest you pay overall. Your existing mortgage lender may allow you to reduce your term, or you could remortgage to a new deal.

The side effect of a shorter term will be higher monthly repayments. Be careful not to cripple yourself with your mortgage payments by only setting them 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 repay your mortgage early.

4. Making overpayments on your mortgage

Many 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 to how much you can overpay (typically 10% of the loan amount), after which there will be an Early Repayment Charge.

5. Offsetting your mortgage

Another option is the offset mortgage. This works by having a savings account linked to your mortgage. Monies held in the savings account are taken off – or offset against – the mortgage balance, so you're only charged interest on the mortgage balance minus your savings balance. This, in turn, 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'll go onto a cheaper variable rate, or even if you're considering remortgaging to a cheaper deal, consider maintaining your payments 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!

6. Should you overpay or offset?

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 depending on the terms of the account. 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 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 over your Personal Savings Allowance. No.

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.