Is early repayment right for your mortgage?
Posted on 4th January 2021 at 16:08
If you have money left over at the end of each month, or have received an unexpected lump sum, you may be thinking about paying off your mortgage early. You can save large amounts in interest and potentially cut your mortgage term by years but, depending on your circumstances, it might not be the best option.
So what factors do you need to consider before deciding whether to clear your mortgage early? Here are a few questions to get you thinking.
Does your mortgage allow for overpayments?
Not all mortgage products let you overpay and some will charge you for doing so, but many allow borrowers to overpay up to 10% of the outstanding mortgage with no penalties. If you’re not sure about the terms and conditions of your mortgage, get in touch with your lender or check the original documentation.
Are you enrolled in any pension schemes?
If you’re currently paying into a pension scheme it could be more beneficial in the long run to increase your contributions because of the tax relief offered by the government. If not, consider using the extra money to start saving tax-efficiently for your retirement – the earlier you start a pension the better your chances of a financially comfortable older age.
What are the current savings rates?
Although savings rates have been extremely low in recent years, there may be a fixed rate or longer term savings account that offers a higher rate of interest than that charged by your mortgage lender. Even if it’s only fixed at a higher rate for two or three years, as long as the interest rate after tax is higher than your mortgage rate it would make financial sense to earn this additional interest on your money.
Do you have significant unsecured debt?
Paying off more expensive debt such as credit card and store card balances, and unsecured loans, is always a good idea if you have residual income, and should be prioritised over paying extra sums to your mortgage. Once this type of debt is paid off you’ll automatically increase the amount of money you have available each month and can then consider overpaying your mortgage, which is a lower cost debt.
Do you need extra life insurance?
If you’re currently paying into a pension scheme it could be more beneficial in the long run to increase your contributions because of the tax relief offered by the government. If not, consider using the extra money to start saving tax-efficiently for your retirement – the earlier you start a pension the better your chances of a financially comfortable older age.
Do you have an emergency fund?
Although savings rates have been extremely low in recent years, there may be a fixed rate or longer term savings account that offers a higher rate of interest than that charged by your mortgage lender. Even if it’s only fixed at a higher rate for two or three years, as long as the interest rate after tax is higher than your mortgage rate it would make financial sense to earn this additional interest on your money.
Advantages of paying off your mortgage early
You may be able to reduce your mortgage term by many years depending on the amount outstanding, and enjoy greater financial freedom in retirement.
You’re likely to pay considerably less interest.
You’ll enjoy greater flexibility in your monthly budget once the mortgage is repaid.
Property is considered a safe investment on the whole, but even if the market became unstable you’d be protected from financial uncertainty.
You can achieve peace of mind and a greater feeling of security knowing your home is paid for.
Potential disadvantages of early repayment
Property is an ‘illiquid’ asset, which means it could take a long time to access the cash invested in it. Unless you also have liquid assets such as stocks and shares or cash in an emergency fund, you may struggle financially in the event of a personal emergency or economic downturn.
If you’re channelling all your residual income to your mortgage there may not be money left to save for other large purchases, such as a car, wedding, or holiday, which could force you to take out more expensive unsecured borrowing.
A mortgage is typically the largest debt that people take on. It represents a huge financial commitment whatever your stage of life and paying it off early always seems a very attractive option at first glance.
Before you do, though, consider some of the other areas where the money could be put to better use, at least for a while – then you can go ahead with confidence and potentially shave years off your mortgage term.
Tagged as: Finance
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