Is it possible to pay off your mortgage early or will you have to pay until you retire?
How amazing would it be not to pay the mortgage each month? Whilst you might think this is nothing more than a pipe dream or only possible if you see out the 25 or 30-year term on your mortgage, it could be quite possible to pay your mortgage off much faster than you had thought.
For many of us, the prospect of ever paying off our mortgage is a long way off, something reserved for pensioners and not likely to happen for us any time soon. But, with mortgage payments making up over 50% of the average person's wages, wouldn't it be fantastic if we could stop having to make that payment each month? Not to mention the peace of mind that you own your home outright and will never have to worry about mortgage rates again.
So is it possible to pay off your mortgage early, or will you be beholden to mortgage lenders until you retire? Perhaps, if you could pay off your mortgage early, you could retire earlier? Maybe you could reduce your hours and spend more time doing what you want rather than working hard.
The short answer is, yes, it is possible to pay off your mortgage early, but with a few caveats. It means short-term pain for long-term gain, and it will only be possible if you are comfortably making your current monthly payments without any worries.
If you have a little disposable income each month, it is possible to dramatically reduce the length of time it will take to pay off your mortgage. Spending that spare money wisely can make that dream of early retirement and lower monthly living expenses a reality.
So what should you do?
Don't borrow more:
Perhaps a little obvious, but regardless of the additional equity that you may have in your home right now after a rise in property values, don't be tempted to increase the amount of your mortgage. It is not free money; it's a loan you must repay, so if you borrow more, it will take you longer to pay off.
Reduce the term:
When the time comes for you to remortgage your property at the end of your fixed term, investigate the options to reduce the duration of your mortgage. This will likely increase the monthly repayments, but it will mean that the loan is paid back in fewer years.
Don't increase the term:
If you are struggling to meet your current monthly repayments, you could possibly increase the mortgage term to allow a reduction in the monthly premium. But this means that you will actually repay your loan over more years, which is the opposite of what we are trying to do here. Delayed gratification is the key; the initial positive of a lower monthly payment is soured by the seemingly never-ending mortgage.
Overpayments:
Wherever possible, you can make overpayments above your monthly payment amount. This is the fastest way to make a dent in that loan, as the overpayment will come directly off the outstanding debt without any interest charged.
So how can you make overpayments?
Firstly, you need to double-check that your mortgage lender will allow overpayments. Usually, it is possible to make overpayments of up to 10% of the outstanding loan amount per year. All you have to do is pay the lender more than the monthly premium amount you're supposed to pay each month. This can either be a small amount monthly, random amounts whenever you have spare cash or a lump sum at the end of the year, as long as it is within 10% of the outstanding loan amount.
Why overpayments?
The amount you pay over the set amount each month is not subject to interest payments. If your monthly payment is, say, £1000 each month, a large portion will be interest. But if you pay an additional £200 each month, the £200 will be taken off the total amount of the outstanding loan and, therefore, not be subject to interest. Over time, as the loan amount decreases, the overall amount of interest you will pay will also decrease.
Of course, there is no real need to overpay your mortgage or try to reduce the length of the mortgage term, as most of us will work until our mid-60s, so we can make the payments without any issue.
But, if you'd like to pay less interest over time and pay off that loan so you have more available money in your pocket each month, overpayments on the mortgage are the way to do it.
It's also beneficial because you are in control. If you have spare funds, pay it off the debt, but if you have a large payment due elsewhere and you'd rather not make an overpayment for whatever reason, no problem. You're in charge, and you decide.
Overpayments on a mortgage are not something that many people do or, in fact, even know about. Of course, mortgage lenders would prefer you keep your mortgage for as long as possible so that they can earn the interest from you for borrowing the funds. Therefore it isn't something that they openly discuss very often.
Also, many of us are not very good at delayed gratification - the short-term pain of fewer pounds in your pocket today for the long-term pleasure of paying off your loan faster? It's easy to see why not many people do it, but if you give it a go, you might be surprised at how quickly you can bring down that loan and pay off your mortgage much earlier than you might have thought.
If you have any questions about your mortgage or property in general, contact our expert team today.