3 Mistakes to Avoid when Paying off Your Mortgage Early
Thinking about paying off your mortgage early? Here’s the top 3 mistakes to avoid.
Paying off your mortgage before your term ends can be a great way to save hundreds - if not thousands - of pounds in interest. It might be tempting to do this if you’re able, but there’s a few things you need to be aware of before clearing your mortgage.
What do I need to watch out for when paying off my mortgage early?
The idea of being mortgage-free is pretty tempting. If you’re lucky enough to be in a position to pay yours off, you might be considering clearing the debt to own your home sooner. By making your overall mortgage term shorter, you’ll end up cutting down on interest fees that you would have paid otherwise.
Once you pay off your mortgage in full, you won’t owe your lender any more money. The bank removes its security over your home, and then you own the property outright. Result!
But as with most things in the mortgage world, it’s not always that simple. There’s a few things to consider when paying off your mortgage early. Below are the most common mistakes you can make:
Mistake #1: Your overpayments are only going on interest
If you have the option to overpay on your mortgage, then you might be thinking about throwing in an extra £500 or £1,000 each month. But unless you tell your lender HOW you want this money used, you might not be paying your mortgage off any quicker.
When overpaying on your mortgage, you need to state that the additional money needs to go towards your loan balance, NOT the interest. If you don’t make this clear, your lender might put your extra cash towards the interest instead.
Mistake #2: You’re stretching yourself financially
Throwing all excess cash at your mortgage is an aggressive way to get out of debt. It’s great to be clearing debts faster, but you’re not leaving yourself much security if things go wrong.
It might be worth putting some money into a rainy day fund (e.g. in case you fell ill and couldn’t work for a few months). Then once you’ve got a little bit put aside you can focus on paying off your mortgage.
Mistake #3: You haven’t considered early repayment charges
What you need to remember is: mortgage lenders make money by charging interest on your loan. So when you pay your mortgage early, they’re basically missing out on money they would have made on that interest. This is why some lenders will charge you for early repayments.
Early repayment charges are usually a percentage of your loan, or equivalent to a certain number of monthly payments. These charges can be pretty hefty. For example, a 3% charge on a £250,000 mortgage would cost you £7,500. Ouch.
Don’t lose money trying to save money! Check with your lender to see if you’ll have to pay a charge before you overpay.
How can I pay off my mortgage faster?
There’s four main ways you can speed up owning your house outright:
Shorten your mortgage term
Making your mortgage term shorter actually means you’ll be paying more each month. However, by paying it off sooner, you could save thousands in interest fees and become debt-free sooner. You’ll just need to make sure you won’t struggle with higher monthly repayments.
Overpaying your mortgage is when you pay more than the required amount each month. You can shave off a lot of interest by doing this, and help clear your debt faster.
Most mortgages will allow you to make overpayments of up to 10% per year, but you MUST check your mortgage details to make sure. Not all mortgages will allow you to overpay, so check with your lender otherwise you might get charged.
When overpaying, remember to tell your lender that you specifically want the extra cash to go towards your loan balance, and not the interest. If you don’t do this, you won’t be clearing the debt any faster.
Remortgaging is a great opportunity to get yourself a better deal. You can snag a better interest rate, or bring your mortgage term down to become debt-free faster.
It can be a great way to save you money, but it also costs time, fees and paperwork. So make sure to weigh up your options first. Read our Complete Guide to Remortgaging.