Paying off your mortgage early may be a dream, especially as the cost of living crisis continues. But some people might be in the position to see that dream come true.
There are pros and, believe it or not, cons to paying off your mortgage early. So, if you’re in that position right now, here’s what you need to know.
The pros of paying off my mortgage early
Most people need a mortgage because they can’t afford to buy a property outright. But you may have had a sizeable pay increase since taking out your loan or inherited money.
With interest rates rising, you be feeling the time’s right to clear your mortgage early. Here are the benefits of paying early.
Living without debt
While you may have other financial commitments, the thought of not having to think about monthly payments is enticing. Plus, you’ll free up that monthly fee to pay off other debts. And when they’re paid, you’ll have cash to treat yourself, save it for home improvements or go travelling.
Your home becomes yours
Many people think that when they have a mortgage, they own their home. Well, until every penny of mortgage and interest owed is paid to your lender, it’s really theirs!
Once you pay off your mortgage and interest, however, it becomes yours. You won’t then be restricted to the terms of your mortgage. That means you can rent it out if you want or sell it without having to deal with your lender.
You’ll pay less interest
Depending on the type of mortgage you have, the interest you pay increases over time. It’s the same no matter whether your mortgage is interest-only or repayment.
Paying off a mortgage a few years earlier than planned can save you thousands in interest payments. But make sure you check the small print from your lender before you commit!
The cons of paying off my mortgage early
You may believe there are no drawbacks to paying a mortgage early. Well, that’s not always the case. There are a few points to be aware of before making your decision.
Early Repayment Charges
Most mortgages have either exit fees, early repayment charges or both. When lenders work out your borrowing, they base it on them accruing a level of income from your interests payments.
By paying early, they will be losing out on those payments, so they add a fee to cover this loss. They early repayment charges can vary depending on how early you choose to repay and the size of your loan.
The nearer to the end of your mortgage term, the lower the charges are likely to be. But it could still be thousands of pounds, so you need to work out this cost against the savings you make
Missing out on interest and tax benefits
Using savings to repay your mortgage could mean missing out on interest in your savings account. Interest on savings can be higher than the interest on your mortgage, so holding off for a few more years could mean eventually having more spare cash. It maybe more beneficial to leave your savings in place, especially for any unexpected events!
It may also be better to contribute savings towards your pension fund, depending on your age and how much is in your pot. There are tax advantages of doing so which could outweigh any interest savings you would make.
You need to get the facts from a financial adviser. At The Mortgage Dog, we have access to reputable advisers who can give you all the facts and figures. Please contact us for details.
You pay more interest on other debts
Mortgages maybe a large debt, but their interest fees tend to be lower than other debts. Car loans and credit cards, for example, are likely to attract higher interest. So, it might make more sense to pay off those other debts first.
In the long run, repaying smaller debts with higher interest rates could make more financial sense. Once paid, you might be in a better position to overpay your mortgage – within the terms and conditions – early.
What about remortgaging?
Remortgaging to a product with more flexible terms could be a better option. It would mean you’ll be repaying your outstanding balance more quickly but without attracting those high repayment fees.
With all these points to consider, why not speak to one of our experienced brokers for advice?
Your home may be repossessed if you do not keep up repayments on your mortgage.
