The more you pay off your mortgage, the less you pay in interest over the years. It’s a simple concept, but something that many people overlook. Interest is one of the main ways we get charged for borrowing money and it can add up to a lot of money over time. The cost of interest can be as much as £1,000+ annually on a typical 30-year loan that has £200,000 in principal borrowed. It’s money you don’t have to pay out, if you pay the loan off.
How to Pay Off Your Mortgage Early
Increase monthly payments or reduce your mortgage term
A mortgage is a long-term loan that is usually paid off over 20-30 years. You can choose to increase your monthly payments by either paying more per month, or by choosing a shorter term.
If you are considering doing this, we must first weigh up the pros and cons of changing the term of your mortgage. Here are some things to think about:
Decreased interest payments, pay off mortgage sooner
Cons: increased monthly payments which will need to be budgeted for
Factor in a bigger mortgage deposit
A deposit or down payment is typically the amount of money that the buyer pays for a home when they take out a mortgage. This money is put towards the purchase of the home. A larger down payment often gives you the chance of a lower interest rates. Crucially though by putting more of your savings into buying the house, you will have less to pay out in interest because you will have borrowed less.
Pros: Less interest
Cons: Takes longer to save up a deposit, need to make sure you have left enough over for fees, moving costs and any work the property needs.
Refinance mortgage with a lower interest rate and monthly payment
Refinancing a mortgage is one of the best ways to save on interest and monthly payments.
A refinance mortgage is a great option if you are not satisfied with your current mortgage provider. You can refinance the loan to get a lower interest rate and monthly payment for the same amount of loan or lower amount of loan than you have now. If your mandatory payments are lower than previously, you could continue paying at the higher rate to pay off your mortgage early.
It is important to note that there are fees involved in refinancing as well as appraisal costs, which might make it more expensive than just continuing with your existing rate.
Make lump sum payments to reduce your mortgage
Making monthly mortgage payments over a long period of time can add up. By making lump sum payments, you can reduce the time spent making monthly payments and pay off your mortgage more quickly.
Pros: Pay off your mortgage sooner and reduce your outgoings as you go along (or continue to pay at the same level to reduce the mortgage even quicker)
Cons: Less flexibility for your savings as it’s not easy to get your money back out of the property unless you sell or remortgage (an offset mortgage can help with this)
Move to a less expensive property so you can be mortgage free
Either move to a smaller property or one in a less expensive area. This is a great way of reducing or even eliminating your mortgage. It’s a big step selling your home, but sometimes you need to think big (or smaller).
Pros: less debt
Cons: make sure you don’t end up spending more in other ways e.g transport costs