Advantages and Disadvantages of Paying Off Your Mortgage Early
There are a plethora of benefits to repaying your mortgage early, if you’re in the fortunate position to be able to consider this option. The important question, however, is should you?
Here, we’ve rounded up the pros and cons of settling your full debt before it’s due to help give you a better idea of whether to go ahead with it.
The advantages of early repayment
Whether you’re a strong earner, cautious saver, or have perhaps received a sizable inheritance, you might be tempted to pay off your mortgage earlier than you’d originally planned.
Here are the main benefits of wiping out your mortgage loan ahead of schedule:
Even if your mortgage is not your only debt, it will undoubtedly be your largest, in the vast majority of cases. Freeing yourself from this level of financial commitment could, therefore, be very beneficial to your overall circumstances. You may even be able to improve your work-life balance without the burden of monthly repayments to worry about.
What’s more, the additional cash you’ll free up each month can be put towards far more enjoyable expenditures, such as travelling, or luxury items you wouldn’t otherwise have afforded.
Reduces the overall interest you pay
Depending on the type and size of mortgage you have, the amount of interest payable each month will differ considerably. But, no matter whether you’re repaying on an interest-only or repayment basis, the longer your mortgage term lasts, the more interest you’ll repay overall.
Paying off your mortgage even a few years earlier than anticipated could save you thousands of pounds in interest, however, it’s important to be clear on your mortgage terms and conditions before you commit to this type of decision.
Your home will be your own
Once you’ve repaid your mortgage in full, your home is yours to do with as you see fit, so repaying early means that you get to enjoy the autonomy of this sooner rather than later. You’ll no longer be bound by any restrictive terms, and can choose to sell, rent out, or even give away your property to relatives, should you wish to do so.
What’s the catch?
Whether you’re able to repay your mortgage early, and whether you should, will depend on your individual circumstances, and much like any significant financial decision, there are both advantages and disadvantages.
Not all disadvantages will apply in all cases, but those that are likely to are:
Early Repayment Charges (ERCs)
The vast majority of mortgages will have either early repayment charges, exit fees, or both. Your lender calculated borrowing based on them accruing a certain level of income from your interest payments. If you opt to repay your loan early, this type of fee helps them to claw back some of the costs that they’ll lose out on, if you stop paying them interest earlier than they expected.
ERCs can vary dramatically depending on how early you choose to repay and the size of your loan. The further towards the end of your mortgage term you are, however, the lower the charges are likely to be. That said, this figure could still easily be multiple thousands of pounds, so it’s important to weigh the cost of this against the savings you would make from repaying early.
Missed interest and/or tax benefits
If you’re planning to use your savings to repay the balance on your mortgage, it’s worth bearing in mind that if the interest you’re currently accruing on your savings is greater than the amount you’re paying on your mortgage, you may achieve greater benefits by leaving the savings where they are for the time being.
Depending on your age and the state of your current pension pot, it may also be more beneficial to contribute your savings funds towards your pension, rather than repaying your mortgage with them. In some cases, the tax advantages of doing so would outweigh any interest savings you’d make.
Not prioritising your higher interest borrowing
If your mortgage is not your only debt, there’s a good chance that your other debts are being repaid at higher rates of interest. Whilst mortgage interest rates have risen dramatically in the past year, they continue to be significantly lower than many unsecured debts such as credit cards and car finance, in the majority of cases.
Therefore, repaying smaller debts with higher interest rates could be more advantageous in the long run. Once these are repaid, you’ll have more money available each month to contribute to repaying your mortgage, and may still be able to do so early.
How can you pay off my mortgage early?
If you’ve had a large windfall, it’s possible to repay the entire loan with a single lump sum. Bear in mind that this will incur fees, but unless these fees are higher than the cost of the remaining interest repayments, it’s often the simplest and most affordable way to finalise your mortgage early.
How remortgaging could help
Whilst you wouldn’t be immediately mortgage-free, remortgaging to a product with more flexible terms could help you to repay your outstanding balance more quickly. If your current mortgage lender does not offer the following options, it may be worth considering remortgaging for the ability to:
Many modern mortgage products offer the option to overpay the equivalent of 10% of your total loan amount annually, on top of the standard monthly repayments, without incurring any fees or charges. This gives you the opportunity to finish repaying earlier than intended, whilst avoiding ERCs.