How to pay off your mortgage early

Most people would love to pay off their mortgage early and pay much less in interest payments over time, but achieving that goal is not very straightforward.

The average mortgage term is 25 years. Provided you’re on a repayment mortgage and have never lengthened the term, you should be mortgage free 25 years after you first got the mortgage.

Even if you’ve secured low-interest rates each time you’ve remortgaged, you’ll have paid tens or possibly hundreds of thousands of pounds in interest alone.

Here are four steps you can take to pay off your mortgage early, minimise the amount you spend on interest and free up your income.

  1. Shorten your mortgage term
  2. Overpay your mortgage
  3. Remortgage
  4. Pay fees upfront

1. Shorten your mortgage term

Shortening your mortgage term will mean you are debt-free sooner. But because your payments will be spread over a shorter period of time, your monthly repayments will increase. Make sure you are in a financial position to meet these higher costs.

Here’s how it works:

You take out a £200,000 mortgage with a 3 year fixed rate of 2.5% over a 25 year term. At the end of three years, you’ll have 22 years left on the mortgage, repaid some interest, and still owe £188,187.

At this point, you could just get the cheapest 22 year mortgage you can find, or you could get a mortgage with a 20 year term instead.

By shaving two years off the term, you’ll save £3,522 in interest, but your monthly payments would increase from £928 to £997. (This assumes switch to a new mortgage deal with an interest rate of 2.5% every two years.)

2. Overpay your mortgage

Overpaying your mortgage is when you pay more than the required amount. Overpaying is another way to be debt free sooner but you only benefit if your lender allows overpayments on your particular mortgage. If not, you may have to pay a charge.

Most mortgages allow for overpayments of 10% per year but some do not – check your paperwork or ask your lender to be sure. The last thing you want is to cancel out the financial gains of overpaying by landing yourself with a fee.

For example, you get a £200,000 mortgage with an initial interest rate of 2.5%. Assuming your interest rate stays at 2.5% (if you keep switching to a new promotional deal every few years), your monthly repayments will be £897 and you’ll be debt free after 25 years.

Overpaying 10% each month brings your monthly payments to £986.70, which means you’ll pay off your mortgage four years earlier and save yourself thousands in interest payments.

Before you pay anything above 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.

Always check the next statement to make sure your payment has been applied properly.

3. Remortgage

Unless you remortgage to cheaper deals throughout your mortgage term, you’ll eventually end up on your lender’s standard variable rate (SVR).

The average SVR currently stands at 4.9% whereas the average 2 year fixed rate mortgage is 2.49%, so staying on an SVR would cost you.

For example, your mortgage is £200,000 and fixed at 2.5% for three years on a 25 year term. After three years, you revert to your lender’s 4.9% SVR – remember, variable rate mortgages can go up or down.

Without remortgaging at all (and assuming the rate remains at 4.9%) you will have paid a total of £307,807 by the end of the mortgage.

If you had remortgaged to another 2.5% fixed-rate mortgage and did this throughout your 25 year term, the overall payment would be £244,877. This means you’ll have saved £62,930 just by switching mortgage deals every few years!

Although remortgaging could save you huge amounts of money, it does come at a cost in terms of fees, time and paperwork, so be sure to carefully weigh up the pros and cons first.

Get an offset mortgage

When you come to remortgage, you might benefit from an offset mortgage. An offset mortgage provides a link between your savings account and your mortgage with the same lender.

Your cash savings are offset against the size of the outstanding home loan, so you’ll pay less in interest.

For example, you have a £200,000 mortgage and £10,000 in savings. Here, your £10,000 ‘linked’ savings reduce your mortgage by the same amount, meaning your debt goes down to £190,000 (£200,000 minus £10,000).

As monthly payments are usually worked out on the whole debt (£200,000), you’ll pay less interest and overpay your mortgage without penalty, meaning you could pay it off sooner.

Offset mortgages are generally best for higher tax rate payers or those with big chunks of savings.

4. Pay fees upfront

Mortgages with low interest rates often come with high fees, some as much as £2,000. It’s common to tack these fees on to the mortgage amount to avoid having to pay them upfront.

In doing this you potentially reduce your chances of paying off your mortgage early because your monthly repayments will increase.

However, if you can pay the fees in a lump sum at the start of your mortgage, you’ll pay less interest overall and are more likely to be in a position to overpay (within the limits set by your lender) and pay off your mortgage early.

Should I pay off my mortgage early?

Paying off your mortgage early is usually a savvy decision. It can save you thousands of pounds in interest payments over the mortgage term.

But there are a few situations where it might make sense to do something else with your extra cash.

Here are three questions to ask before paying off your mortgage.

1. Should you put your cash into a savings account instead?

Put very simply, if a savings account has a higher interest rate than your mortgage, it might be better to save your money rather than pay off your mortgage loan.

2. Does your mortgage have an early repayment charge (ERC)?

Most mortgages with an introductory period, including fixed, tracker and discount mortgages, have an early repayment charge (ERC).

This is usually a percentage of the remaining mortgage loan. For example, say you've got a £200,000 mortgage that's fixed for 2 years. If it has an ERC of 2%, you would have to pay the bank £4,000 if you pay off your mortgage early.

Longer fixed rate periods, such as a 5 year fixed mortgage, often have a larger ERC.

The early repayment charge also applies if you remortgage to a different lender.

Most mortgages do not have an ERC after the introductory period ends.

To find out if you have an ERC on your mortgage, check your mortgage documents or phone up the lender and ask.

3. Should you clear other debts first?

If you have other debts, like credit cards or loans, it may be better to pay those off first.

It mostly comes down to the interest rate. Mortgages tend to have very low interest rates compared to credit cards, car loans, store cards, and other lines of credit.

It makes very little sense to overpay on your mortgage if you're paying 20% interest on your credit card balance!

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Last updated: 24 September, 2019

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