Homeowners with low mortgage rates have an easier time paying off their mortgage early. But is that a good idea? It’s not a “yes” or “no” question.
You might be better off putting extra money in an ISA or pension than paying off your mortgage ahead of schedule, for example.
If, after considering the potential downsides, you still want to pay off your mortgage early, here are four ways to make it happen.
- Remortgage your home with a shorter-term mortgage.
- Pay a little more each month.
- Make an extra mortgage payment every year.
- Throw all “found” money at the mortgage.
1. Remortgage to a shorter-term mortgage
You can pay off the mortgage in another 15 years by remortgaging into a 15-year mortgage.
Let’s say you got a 25-year fixed-rate mortgage for £300,000 at 2.5%. Five years later, you refinance into a 15-year loan at 2%. Doing so pays off the mortgage 10 years earlier and saves you tens of thousands of pounds.
But remortgaging comes with various fees and charges. And a quicker payoff means higher monthly payments. You’re locked in if you decide that you don’t have the extra money one month to put toward the mortgage.
Unless the new interest rate is lower than the old rate, there’s no point in remortgaging.
2. Pay a little more each month
You can get all the benefits of an early payoff without the extra costs of a refinance by paying more each month – as long as you don’t have a mortgage that prevents overpaying, of course (which is most fixed-rate mortgages).
Divide your monthly principal and interest by 12 and add that amount to your monthly payment for a year. Result: You make the equivalent of 13 payments in 12 months.
Let’s say you got a £300,000 mortgage at 2.5 percent. After five years of making the minimum payments, you add an extra 1/12 of a month’s principal and interest to each monthly payment. Doing so pays off the mortgage two years and six months earlier and saves over £11,000 in interest payments.
Before you make anything beyond the regular payment, call your mortgage provider and find out exactly what you need to do so that your extra payments will be correctly applied to your loan.
Let them know you want to pay more aggressively and ask the best ways to do that.
Always check the next statement to make sure your payment has been applied properly.
3. Make one extra mortgage payment each year
Instead of paying a little more each month, make one extra monthly payment each year. One way to do this is to save 1/12 of a payment every month, and then make an extra payment after every 12 months.
Let’s say you do this starting the first month after getting a 25-year mortgage for £300,000 at 2.5 percent. That would save about £11,000 in interest, and you would pay off the mortgage two years and six months earlier.
4. Apply ‘found’ money toward the mortgage
Got a bonus at work, a tax refund or an unexpected windfall? Funnel some or all of that money toward your mortgage.
Let’s say you got a 25-year fixed-rate mortgage for £300,000 at 2.5 percent. Then, five years later, you can pay an extra £10,000 in a lump sum (as long as your mortgage allows such an overpayment!) Doing so pays off the mortgage a year earlier and saves you more than £6,000 in interest.
The downside to this approach is that it’s hard to predict the mortgage payoff date. And be careful of putting so much extra cash toward the mortgage that you come up short for other needs.