Many homeowners worry if paying off their mortgage early is worthwhile. While there are advantages to living mortgage free, there are also drawbacks to consider.
On one side of the argument, early mortgage repayment might give financial security and peace of mind but on the other side, you may lose out on investment possibilities that offer a better return than the interest you save by paying down your mortgage.
As you can see, by going through some early reasons for whether you should pay off a mortgage or not there are a lot of complicated issues involved in the topic with most issues requiring in depth knowledge like in this article.
So, read on for all the information you need and be sure you know what you’re doing before you pay off a mortgage as doing so is a big decision that if you don’t do correctly could ruin your credit score or lead you to paying the wrong tax in an SA302.
Is it advisable to pay off a mortgage early?
In general, if you have considered making extra payments on your mortgage and you can afford it, it can save you a lot of money in the long run because there are less years where there is interest compounding on the loan.
So, you will pay less interest and pay off your mortgage faster if you make extra payments which will result in you paying less mortgage overall and these effects will be felt a lot more in the long term.
For instance, if you have a £300,000 mortgage at 5% with 25 years left, paying off a lump sum of £10,000 could save you £23,000 in interest and help you repay it 18 months sooner.
Furthermore, overpaying when interest rates are low results in a smaller mortgage to deal with if interest rates rise in the future so it may be better to make the most of low interest rates while they are here.
However, before making any additional payments, consider your personal situation and whether overpaying is the best option for you as for some people, investing your money somewhere else could actually be the best thing to do.
What are the advantages of paying off a mortgage early?
If you own a home, paying off your mortgage early may seem like a pipe dream as when you first buy a home, often the large amount of debt you take on may seem like a real challenge to clear off.
However some people have significant increases in their salary or are able to inherit a large amount of money that helps them in their journey of buying a home and they are able to benefit from a wide range of advantages.
First of all, you could save a lot of money on interest charges, leading to a more financially secure future. Another big benefit to being able to pay off a mortgage early is that you can help build the equity in a home a lot quicker so you can use the money you make for other things in your life.
Examples include having cash flow to invest in other property or perhaps building up other investment types to save for the future or plan for retirement.
Finally, while this isn’t a benefit that directly relates to you being able to make more money or save more money, ahing the peace of mind that you have successfully paid off a mortgage and now own a home could be a big advantage.
For many, this is a lifelong dream and being able to do this earlier than expected could be a big deal. However, while there are advantages for paying off a mortgage early, there are also cons that you should know about by reading on.
What are the disadvantages of paying off a mortgage early?
Before you begin making additional payments, you must consider all of the possible outcomes, not just the ones that benefit you. The cons may outweigh the pros which could be a bad decision for you as a buyer.
For example, if you pay off your loan early, you may miss out on a mortgage interest tax deduction. This is where you are able to take away the cost of your mortgage from the taxable income of a property. For more on this click here.
In addition to this, there may be a prepayment penalty that you must pay, which could deplete your savings and make the early repayment not worthwhile.
Finally, you may want to look into other ways to invest your money, such as stocks or mutual funds, which may provide a higher rate of return than paying off your mortgage early purely to save on interest.
If you are able to make more than the savings on your interest by investing elsewhere, then the only other reason why you should pay off your mortgage is if it is a personal choice.
What questions should you ask yourself before you decide on paying off a mortgage early?
If you’re thinking about paying off your mortgage early, you might be in for a rude awakening. Most mortgages have an early repayment penalty that can be quite high, running into thousands of pounds.
Despite the high fee, paying off your mortgage early may make sense in the long run as you may end up saving more money than you will spend on the early repayment fee if you reduce the amount of interest you will pay over time.
In order to decide, you should ask yourself the following question which will help you gauge whether it is a good decision.
Do you owe money on any higher-cost debts?
If you have ever found yourself unable to repay some of your debts in addition to your mortgage, then it is probably a good idea to pay off these first.
These are the ones that will cost you a lot of money to pay off in the long run such as credit card debt and catalogue credit which are two examples of debts with a high annual interest rate.
You could also be dealing with other costly debts, such as unsecured loans, which have much higher interest rates than your mortgage borrowing costs so should be paid off as soon as possible.
Click here to work out how you can make sure all your debt is consolidated into one place so you’re able to pay off the debt you have that is outside of a mortgage with the lowest interest possible. Often this means going to a debt consolidation agency.
So, prioritise paying off your high-interest debts before considering a mortgage reduction and be careful not to re-acquire these debts after you have paid them off. Having a good financial understanding is essential to paying off any house mortgage.
Are you contributing to a pension plan?
Because of the tax advantages, saving through a pension plan is an excellent way to maximise your savings. The government provides tax relief by increasing your contributions, allowing you to save more money.
Pensions could be the solution you’re looking for as they are tax-efficient and if you are fortunate enough to have a workplace pension, your employer should contribute to the plan as well. If you don’t already have one, it’s worth thinking about getting one if you have some spare cash.
It is critical to begin saving for retirement as soon as possible regardless of what mortgage you’re able to apply for with a mortgage in principle. The earlier you begin, the faster your retirement fund will grow.
Would your loved ones be financially secure in the event of your passing?
If you have loved ones who rely on you, you should think about getting life insurance which will help them financially if you were to pass away. The good news is that this type of insurance is relatively inexpensive, especially if you buy it early in life.
Unless you have additional funds available, don’t put off protecting your loved ones until it’s too late. Take the time to investigate life insurance options that meet your requirements and budget.
Is there potential for a higher return on your savings?
If there is a very low interest rate on your mortgage, it may be better to save your money in the highest rate interest account you can find. However, as interest rates go up on savings accounts interest tends to be higher anyway.
Therefore it wouldn’t make sense most of the time to invest money in a savings account anyway it is better to find a better return on your money as savings accounts tend to cap at around 3% on the highest end.
In these cases, your money could also be locked up for months so if you need it in an emergency, you will not have any access to it.
What should you know about your mortgage before you overpay?
So, if you have decided that overpaying is a great idea, then you may be able to go ahead with it. So long as there are certain details that are correct with your mortgage. The below questions will help you decide.
When you overpay on a mortgage, do you have to pay a fee?
If you’re thinking about overpaying your mortgage, make sure you understand the potential fees that will eat into any savings you make.
Remember that some lenders may charge you if you pay off your mortgage early or go over your agreed-upon monthly limit. So, before you start making extra payments, make sure you understand what you’re getting into.
Many lenders, however, allow overpayments of up to 10% per year without penalty. This means that you can lower your mortgage balance without incurring any additional fees.
Check your mortgage terms carefully and contact your lender if you have any concerns about overpaying. This way, you can make an informed decision and reap the benefits of debt reduction.
Is your mortgage a flexible or offset mortgage?
Have you ever heard of flexible mortgages, also known as offset mortgages? If so, you will know that they allow you to overpay your mortgage without incurring penalties and then withdraw the money when you need it.
This type of mortgage is especially useful if your income is irregular or you anticipate a large expense in the future. You can reduce your debt and save money on interest charges by overpaying your mortgage when you can.
If you need the money back, you can get it without paying any fees or penalties. It’s a savings account and a mortgage rolled into one.
If you’re interested in this type of mortgage, make sure to research your options and speak with a mortgage advisor as they can assist you in locating the best deal for your needs and financial situation.
What are some common mistakes you should avoid?
As with a lot of complex financial decisions, there are some pitfalls to be aware of along the way. Hopefully, by the time you’ve read the below points, you should be aware of them so you don’t make ebay mistakes.
Your payments are interest only
If your payments are interest only, then you may just be paying off the interest part of the loan. When it comes to interest only mortgages, which are common with buy to let mortgages, there is commonly a fixed term of the deal where you only pay off interest.
This means if you pay off all the interest, you will still be left with the equity in the loan to pay off any you may have to end up remortgaging unexpectedly.
Speaking to your lender about this and making sure that you are aware of the terms and agreements of the deal alongside being cognizant of where your money is going is the best way to avoid this mistake.
You’re spending too much money on repayments
If you want to pay off your mortgage faster, you must strike a balance between debt repayment and putting money aside for unexpected expenses. While overpaying your mortgage can be a good way to reduce your debt, it’s also a good idea to save some money for a rainy day.
You can have a cushion in case of an unexpected expense or job loss by putting money into an emergency fund.
Once you’ve saved some money for security, you can focus on paying down your mortgage and you’ll be making progress on your debt while also gaining some peace of mind in the process.
Not taking into consideration early repayment charges
Sometimes, if you’ve tried to pay off a mortgage early, you’ll end up with a fee that you have to pay in order to end your agreement with the lender. This would have been written in the terms and condition of your mortgage when you got approved for it.
However, because mortgages span over a large number of years, it can be easy to forget that this fee exists and the fee may surprise you. Especially if there are rules in the contract that allow the fee to increase over the years.
To summarise, this article addresses the advantages and disadvantages of paying off a mortgage early. While it can give financial security and save you money on interest over time, it may also mean missing out on investment possibilities and tax benefits like section 24.
Before you make any more payments, you should think about your unique position and whether overpaying is the best decision for you as the choice to pay off a mortgage early should be based on particular circumstances.
If any of the topics discussed are too complicated, read more of our articles on residential mortgages and perhaps read up on how long does a mortgage application take so you’re able to learn more.
Can provide useful additional space to your home
Additional space is useful not only for the financial benefit but also simply because you can use the space for whatever you please and the annexe will probably be fit to house a person.
Many people have outhouses and sheds that they spend time in but an annexe means you won’t ever have to leave to access any amenities like the bathroom or kitchen as this is all built into the design of an annexe.
When looking at annexes overall, first of all, what is notable about buying one is the additional decision making you have to do in order to make sure the property purchase is worth the time and money.
There are a good few factors that go into finding the right property for you and there is also the added complexity of finding a mortgage for an annexe on top of this.
So, make sure you collect as much information as you can before you go about applying for any type of mortgage and beware of the risks of buying an annexe.
It should be clear that the advantages of buying an annexe outweigh these risks at all times.