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Mortgages

Should You Repay Your Mortgage Early?

Introduction

With interest rates at a historical low, it is well worth your time to look into paying off your mortgage early.

The benefit of this is that the interest rate in the future will take a percentage of a smaller amount since you are paying more each month, thus decreasing the overall money you are paying for your mortgage; the drawback is that lenders don’t want you to do this, and may charge a fee for paying early.

The best course of action would be to communicate with your lender about any possible penalty fees; if you have any further concerns contact a mortgage advisor (we recommend Which?).

Overpaying your monthly mortgage

You should pay off expensive debts with higher interest rates (unsecured / personal loans, credit card debt) first, before you move on to your monthly mortgage payments.

Have at least 3 - 6 months of money in reserve before reaching into your savings account to pay off mortgage early.

With interest rates at an all-time low, a lot of adjustable rate mortgage plans are low as well, since they are on track with the Bank of England base rate. Communicate with your lender about whether or not the charge a penalty fee for paying your mortgage early. If they do charge a penalty fee, then should evaluate whether or not your savings would exceed your costs if you do proceed with overpaying your mortgage.

Paying off mortgage early vs. Saving

Finding a savings account rate that would be more than your current mortgage rate is highly unlikely in this market, thus making it more promising to pay off your mortgage early, saving you possibly years off your mortgage payments.

Try this Mortgage Overpayment Calculator to see whether pay off your mortgage early makes sense.

Refinancing

Consider refinancing if:

  • You are able to lower your interest rate by at least 1 - 2%, since refinancing typically costs around 3 - 6% of the loan’s principal, and if that is not the case then your refinancing costs may indeed exceed your savings.
  • Interest rates have decreased and you are looking to decrease a loan’s term while incurring the same monthly mortgage payments.
  • Interest rates are falling. Converting to an Adjustable Rate Mortgage plan may be a great option for homeowners who are only planning to reside in their current property for at least few more years. This will benefit them because they will incur the benefits of the lower interest rates with lower monthly mortgage payments, and will not incur the rise in monthly mortgage payments when interest rates eventually rise again, which will most likely not be in the near future.

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