A mortgage is a large, long-term commitment, and there are good reasons to pay it off early. Find out the pros and cons of using your savings to clear your mortgage.
The benefits of overpaying your mortgage
If you can afford to make extra payments, overpaying your mortgage means you pay less interest in the future and pay off your mortgage sooner. This means you could save a lot of money.
On a £150,000 mortgage at 5% with 25 years remaining, paying off a £5,000 lump sum reduces the interest by £11,500 and means you would repay it 18 months earlier.
Overpaying when interest rates are low means you’ll have a smaller mortgage too if there are higher interest rates in the future.
But depending on your circumstances, there are some other questions you need to ask yourself.
Early mortgage repayment – questions to help you decide
Should you save or pay off your mortgage early? Answer these questions to help you decide.
Do you have any other more expensive debts?
Expensive debts are those that cost a lot to pay off over time.
Credit cards and catalogue accounts, for example, charge a high rate of interest over the course of a year.
Other expensive debts could include unsecured loans, where the interest rate is much higher than the cost of your mortgage borrowing.
Always pay off more expensive debts before thinking about reducing your mortgage – but be careful not to rack them up again.
Are you putting money into a pension scheme?
Pensions are a tax-efficient way to save because the government tops up your contributions with tax relief.
And, if you have a workplace pension your employer should pay into the scheme too.
If you don’t have a pension and have money to spare, it’s important to think about paying into one.
The earlier you start, the sooner your retirement pot will start to grow. With employer contributions and tax relief from the government, you might get more for your money in a pension than you’d save in mortgage interest.
Find out more in our guides:
Why save into a pension?
Check my pension and the progress of my retirement savings
Could your family cope financially if you died?
Do you have dependants? The cost of getting life assurance is relatively low. If you haven’t got this already and have a family or other dependants, now’s the time to think about it.
Can you get a better return on your savings?
If you’re already paying into a pension scheme rather than putting extra money into your mortgage, it might make more sense to add it to savings.
That’s if you can find a savings or investment product that provides a better rate of return than the rate you’re being charged on your mortgage.
Other things to consider if you want to pay off your mortgage early
Keep some money in reserve
Make sure you’ve saved enough money to keep you going for at least three months before paying off your mortgage early.
Will you be charged for overpaying your mortgage?
Check your mortgage deal to get an accurate picture of how charges can cut into any savings that result from overpaying your mortgage.
You could be charged for paying your mortgage off early or making a monthly payment, which goes over your agreed monthly limit.
Many lenders will let you overpay up to 10% a year without penalties.
Do you have a flexible or offset mortgage?
Flexible mortgages – including offset mortgages – allow you to overpay your mortgage and then draw back the money if you need it – all without charge.
If you decide to overpay your mortgage
If, after weighing up all the facts, you decide to overpay, you need to time it right.
If your mortgage interest is charged daily, the sooner you make the overpayment the better.
If it’s charged annually, you need to time your overpayment so it counts towards the calculation of the interest for the year.
