Five clever tactics to pay off your mortgage early

Telegraph

6 days ago

Mortgages are the one financial service you spend years trying to get, but then want to be rid of as soon as you can.
For most of us, a mortgage is the key to getting on and climbing up the property ladder, but they can also be your biggest monthly expense. With recent rate volatility in mind, it's hardly surprising that becoming mortgage-free often becomes the next financial goal.
David Hollingworth, of mortgage broker L&C, says: 'Having a mortgage is a necessary part of making the dream of home ownership become a reality for most people, but from then on, the focus will usually shift to being rid of what will generally be the biggest debt we'll ever have.'
Overpaying your mortgage is one way to do this, but if you're faced with the prospect of trying to chip away at a six or even seven-figure sum it can be rather daunting. However, there are several tactics you can adopt that will see you pay little and often, which can shrink your borrowing without dramatically affecting your budget.
Here Telegraph Money, shares five tips to help pay your mortgage off early, and potentially save thousands.
Five ways to pay off your mortgage faster
1. 'Round up' your monthly payments
The 'round up' idea has been popularised by the many banks that offer the service to help boost savings – when you make a purchase, say, for £3.50, the money that leaves your current account will be rounded up to the nearest pound and the remainder sent to a savings pot – in this case, 50p.
The same theory can be applied to mortgage overpayments.
'If your mortgage payment is £842, round it up to £850 or £900,' suggests Ying Tan, chief executive at mortgage broker Habito. 'The extra goes straight towards your remaining balance.'
Rounding up by just £50 a month – an amount you might not miss from your bank balance – on a £200,000 mortgage over 25 years could knock one year and 11 months off your term and save over £13,000 in interest, he adds.
2. Overpay by £100 a month
There is also merit in keeping this simple, and sticking to paying a little bit extra each month (whether that's £50, £100, or more), as this can be a great way to chip away at your mortgage over time.
Mr Tan says: 'On a £200,000 mortgage over 25 years at 5pc, overpaying £100 a month could save around £24,000 in interest and shave off over three years from your term.'
You might want to think about setting up regular overpayments at those occasions where you feel able to loosen the financial purse strings – such as getting a promotion or pay increase at work.
'Earmark a portion of salary increases or reduced expenses, like childcare costs dropping, towards your mortgage,' says Aaron Strutt, product and communications director at Trinity Financial.
3. Maintain your repayments when your mortgage rate drops
If you're on variable-rate mortgage and your repayments drop when interest rates fall, you could ask your lender to maintain your repayments at their former level.
This can be easier to budget for, as you'll already be used to paying your mortgage at the higher rate.
Mr Hollingworth points out that you can also do this if you have slipped into paying your lender's standard variable rate (SVR) before remortgaging on to a more competitive deal.
'This could be a great way to make the most of a lower interest rate,' he says. 'For example, if a £200,000 repayment mortgage was originally at 5.25pc, the monthly payment would be £1,198.50. Switching to 4.25pc would cut the payment to £1,083.48 a month, but maintaining the original payment would lock in an overpayment each month and would ultimately pay the loan off three years, 10 months early [and save £21,950 in interest].'
4. Make bi-monthly payments
We're all used to paying our mortgages once a month, but another option is to make two smaller payments each month instead.
'The concept is to effectively overpay by an extra month's payment each year by making payments every two weeks,' explains Mr Hollingworth, but he warns not every lender will oblige. 'Most lenders will take payments through direct debit so be sure that you check on whether it's even possible. Some may not be able to accommodate it and you also need to be careful that you would be hitting the required monthly payment on time.'
If your lender is willing, it might be worth the effort. Mortgage broker Mojo says this strategy could save the typical borrower £49,118 in interest and knock four years and nine months off a 30-year term.
5. Pay in a windfall
'Putting your annual bonus, inheritance, or even cashback into your mortgage can make a huge dent,' says Mr Tan.
He explains that paying £5,000 off a £150,000 mortgage could save you £11,710 in interest and let you pay it off one year and seven months early (based on a 5pc mortgage rate and a 25-year term).
Adding this 'extra' money to your mortgage repayments mean your usual budget won't be affected, but you'll need to make sure such one-off sums don't cost you in early repayment charges (more on these later).
You'll also need to be sure to tell your lender that you want to shorten your mortgage term – otherwise it may keep the term the same and reduce your monthly repayments instead.
How to overpay your mortgage
Most lenders will let you overpay by 10pc of the original loan amount a year without incurring any penalties, but some – such as NatWest – will allow you to overpay by up to 20pc.
Just how easy it is to set up regular or one-off overpayments will depend on your lender, and what you want to do. For example, if you want to keep your repayment the same after a rate reduction, you might need to ask your lender to manually set up a monthly overpayment each time rates change – it may not be able to automate this.
However, setting up simple overpayments is normally pretty straightforward as Mr Strutt notes: 'Most of the bigger lenders have apps their customers can download so they can go online and set up, then manage, their overpayments.
'It's surprising how many people with mortgages do not know about these apps and just how easy it is to make overpayments. Once you get in the habit of making overpayments then you get used to it, and you can adjust the payment to suit your budget.'
The benefits of overpaying
There are three key benefits of paying your mortgage off early:
You'll save on interest: 'Often tens of thousands over the life of your loan,' Mr Tan points out.
You'll be mortgage-free faster: Once you have paid off your mortgage you can use the cash you had been paying out to step up your retirement saving, help the kids or just enjoy the benefits of your hard work.
Peace of mind: 'No more rate hikes to worry about. It's a big psychological win,' Mr Tan adds.
Find out how much you could save with our mortgage overpayment calculator.
What to think about before making overpayments
While there are financial and psychological benefits to paying off your mortgage early, it's still important to think carefully before you plough all your spare cash into overpayments.
Look out for early repayment charges (ERCs): These are essentially penalties for paying off your mortgage too quickly, and are common on fixed-rate mortgages. They could hit you hard if you overpay more than the allowed amount. Mr Hollingworth advises: 'Before overpaying it makes sense to check that an ERC will not be incurred. If so, it will put a big dent in – or even wipe out – the benefit of overpaying.'
Could you get a better return on your cash elsewhere?: If you're lucky enough to still be paying ultra-low mortgage rates, you may be better off earning interest on your cash in a savings account, rather than prioritising mortgage overpayments. Depending on your attitude to risk there may also be an argument for investing your spare cash, using a stocks and shares Isa, for example.
Do you have other expensive debts?: If you have any outstanding personal loans or credit card debts, it makes sense to pay them off first as they typically charge a higher interest rate than mortgages.
Are your retirement finances on track?: It's great to pay as much off your mortgage as you can, but it shouldn't be at the expense of your retirement pot. It's also important to pay as much as possible into your pension to get the benefit of tax relief on contributions and the compounding of returns over time.
Make sure you still have emergency savings: 'Always think about a rainy-day fund, as overpaying the mortgage will usually mean that it's hard to get hold of the cash at a later date,' says Mr Hollingworth. 'In most cases, it will require a remortgage or a further advance to be able to be able to access the overpaid funds, so make sure there is cash available to deal with unexpected expenses.' Experts typically recommend you keep around three to six months' expenses in an easy access savings account.