Should I pay off my mortgage early?

If you have the means to do so, paying off your mortgage debt early can seem like an obvious choice -- why not get out from mortgage debt as soon as possible?

But while it could be a good option for many homeowners, early mortgage repayment isn’t the right move for everyone.

In this article, we’ll offer insight into the pros and cons of early mortgage debt repayment, how you can decide whether it’s right for you, and what practical steps you can take today to make repaying your mortgage early a reality.

The pros and cons of paying off your mortgage early

Ultimately, the decision of whether to pay off your mortgage debt early comes down to priorities: is paying extra money into your mortgage the best use of your financial resources now?

With that in mind, let’s consider some positives and negatives when it comes to early mortgage repayment.

Pros

• It can help you shorten your mortgage term and get out of debt quicker
• You won't pay interest on the amount you overpay
• The money you save on the interest by overpaying ahead of schedule often exceeds the returns you would otherwise get from a savings account

Cons

• It may prevent you from paying down other debts with higher interest rates
• In the long term your money might be better spent on long-term investments, including your pension pot. Simply put, using your savings to pay off your mortgage early means you won’t have those funds to spend on something else
• You could face significant penalty fees - such as an early repayment charge - for overpaying your mortgage

But it’s also vital to remember that debt repayment isn't just a financial issue. Rather, lightening your financial load offers sizeable ancillary benefits, including decreased stress and improved health.

In fact, studies have found that people who have paid off their debt have reported higher self-esteem and feeling empowered.

In other cases, however, individuals say paying off their mortgage early actually demotivated them from working to grow their wealth, costing them money in the long run.

Do you need to pay off your mortgage before you sell? Find out here

Questions to ask yourself before overpaying your mortgage

As with all questions of personal finance, paying your mortgage off early hinges on your circumstances, which only you can decide for certain.

Some questions to ask yourself include:

• Do you have any more expensive debts?

As a rule, you should pay off your most expensive debts first. Clear your high-interest credit cards and debts before overpaying your mortgage to cut down on the overall interest you’ll pay.

• Can you get a savings rate higher than your mortgage interest rate?

Depending on the rate, sometimes putting money in a savings account will generate more money in interest than you would save by overpaying your mortgage. But if the interest rate on your mortgage is higher than the rate of interest paid on your savings after tax, then you may want to concentrate on paying off your mortgage first. Interest on savings in the UK (as of June 2021) is extremely low, so making overpaying on your mortgage is a bit more attractive at the moment.

• Do you have enough money in reserve in case of an emergency?

As a general rule, experts suggest you have between three and six months of household expenses readily available before deciding whether to start paying off your mortgage early. It is, after all, far easier to withdraw money from your savings account than it is to take money out of your home in case of unforeseen expenses. Similarly, it’s recommended that you establish an emergency fund before paying extra cash towards your mortgage. Make sure you have enough money stashed away for unexpected expenses -- such as auto problems, urgent home repair, or health costs -- before you use that money towards early repayment of your mortgage loan.

• Will you be penalised for overpaying your mortgage?

Some lenders charge early repayment fees when customers try to pay off their mortgages ahead of schedule. These penalties vary between lenders but are typically equal to a certain percentage you would have paid in interest. In the UK, the penalties tend to be between 1% and 5%. Before you make an especially large overpayment, consult your lender and ask about any early repayment penalties so you can make an informed choice.

• Do you have a flexible mortgage?

These mortgages – including offset mortgages – enable customers to overpay and then withdraw money if needed without charge. While these mortgages aren’t right for all homeowners, they’re an option for people who want to retain access to their savings while paying down their overall mortgage balance.

How to pay off your mortgage early

OK, so you’ve made a careful assessment of your current levels of debt and how much money you’ve got coming in. You’ve decided to pay your mortgage off early. But how should you go about it?

Here are a few tips:

• Switch to a biweekly payment schedule

If your lender allows this, it could increase the number of payments you make per year without significantly altering your financial burden. For instance, rather than paying £1000 on a monthly basis, you’d switch to £500 to be paid every two weeks. The financial burden each month will not be dramatically different, but at the end of the year you will have made 26 payments of £500 (equalling £13,000) each versus 12 payments of £1,000 each (equaling £12,000). That adds up. Not all lenders allow biweekly payments, so take a look at your institution’s regulations first.

• Commit to making one extra payment per year

Adding just a lone additional instalment annually may feel more manageable for many homeowners. Plus, maybe you’re making more money now than you were when you took out your mortgage. On a £150,000 mortgage at 2.5% interest with 10 years remaining, making one extra payment per year would enable you to wipe out your mortgage debt nearly a year early.

• Time your payments correctly

For instance, if your mortgage charges interest every day, then it’s in your interest to pay off the balance as soon as possible. But if your mortgage interest is charged annually, it's more important to make sure you schedule your overpayment so it counts towards your yearly interest calculation.

• Make a lump sum payment to reduce your balance

Maybe you inherited money or just received a bonus at work? If you’ve got the money now and want to pour it into trimming your debt, even an occasional one-off payment can be helpful towards your goal of being debt-free.

• Refinance to a shorter term

Shorter repayment periods mean higher monthly payments, but they also mean less interest over the life of the loan. It may cost you more in the short term, but in the long term you'll pay less and get out from under debt earlier. Check with your provider whether this is possible.

• Remortgaging after your fixed term ends

If you decide to remortgage when your fixed term comes to an end, you have two options: get a new deal with your current provider or shop around for a better deal with a different mortgage provider. It’s worth remembering that once your introductory, fixed-term ends, you are likely to be put on your lender’s standard variable rate (SVR), which will probably be much higher (perhaps more than double) your previous one. Before you move on, however, ask your lender if you can shift to a better rate. In fact, you'll be in a stronger negotiating position to seek concessions if you’ve been making regular overpayments because your loan to value ratio will have fallen. A mortgage broker can be helpful navigating this process.

• Contact a professional financial planner to help guide your process

This one’s self-evident, but there’s a reason they get paid to offer advice: they’ve got more training and experience than most of us. Plus, they can advise on what help you can and can’t expect to get from your lending institution.