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Should I pay off my mortgage early?
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Should I pay off my mortgage early?
You find yourself in a position where you can increase your monthly mortgage payments or even pay in a lump sum - is this the best thing to do?
Usually, most people want to pay off their mortgage as soon as they can because this is probably their biggest debt and the rule of thumb is to "pay off your debts as quickly as possible starting with the largest". However, in some circumstances, this isn't always the best approach to take.
The interest that is applied to a mortgage tends to be lower in comparison to the interest that is added to most credit cards, store cards and other loans. But, as the term of a mortgage is usually much longer than that of other types of loan, you will end up paying back more in the long run.
Four reasons why
There are some obvious reasons why you should pay off your mortgage:
- You could use your overpayment to reduce your monthly repayments or the term of the mortgage.
- Becoming mortgage-free as soon as you can means you will have more disposable income later on in life.
- If you are looking at remortgaging, then reducing your mortgage could lead to you getting a better rate as you will have greater equity in your home.
- The longer it takes you to repay the mortgage, the more the lender will earn.
Other considerations
If your mortgage interest rate is higher than the after-tax interest rate on your other savings, then generally you will be better off overpaying your mortgage.
But don't forget about your ISA allowance. You should consider using up your allowance before considering any mortgage payment increases on the grounds that if you don't use it, you lose it!
Then there is always the option of using any extra money you have to fund a second property. If things went well then you could gain, but of course if things took a turn for the worse than you would lose; there are no guarantees. You would also need to take into account the fact that property is only worth what someone will pay for it. What if you needed to sell it in adverse conditions? You might get back less than what you paid for the property.
Check these out
Before making any overpayments into your mortgage, there are a few things you'll need to check first.
Does your mortgage allow you to make overpayments? Some mortgages will impose penalties if you do, especially if you have a special fixed rate or discounted rate. Others will keep any overpayments separately and then only reduce your mortgage once a year, so you could lose interest on any overpayment.
What additional costs or penalties are applied to extra payments? Thankfully, mortgage policies are now a lot more flexible than they used to be and most will let borrowers make overpayments in some form.
What happens to your overpayment? Is it accessible should you need it in an emergency? Some mortgage polices ring fence any overpayments so that you can take them out should the need arise. Taking into consideration the current economic climate, having easy access to your money to cover any unforeseen circumstance, if you haven't already got an emergency fund, is probably wise.
There are also no tax incentives to having a mortgage debt so if....
• you can afford it
• your policy allows it
• you have no high interest loans or credit/store cards
• you already have a good level of savings or emergency fund
....it may be worth considering making extra mortgage payments.
Source: Time For Money