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Is Early Mortgage Repayment a Good Financial Idea?

Taking out a mortgage will most likely be the largest amount of money you ever borrow in your lifetime. It can be a daunting prospect knowing that you owe a bank, online estate agents or other financial lender anywhere in excess of £100,000, and that one day you will have fully paid it off. Each month, seeing that little bit more leave your account can feel like baby steps toward such a big goal.

For this reason, many people are tempted to make early mortgage repayments when possible. Either paying off more each month or just a one-off lump sum, in an attempt to reduce their debt quicker. Is it always the best financial idea though? We look at some of the positives, negatives and figures to do with early mortgage repayment.

Advantages

There are two main advantages for early mortgage repayment, and in most cases they both overlap. These are that you will cut down the time it takes to pay off a mortgage and significantly reduce the amount of interest you pay on it.

Paying off your mortgage quicker than expected holds many advantages. As well as getting rid of such a large financial burden, it frees up a lot more of your finances to spend on other things. Plus, it can make things a lot simpler if you decide to move house again in the near future.

Repaying and overpaying a mortgage early will save you money in the long run as well, unless you have an interest-only mortgage. Fewer years will be spent repaying the debt, leading to less interest being paid and the chance to make massive savings if you choose to repay your mortgage before the agreed term is up.

Average Savings

Overpaying between £50 and £100 a month can shave a significant amount off your mortgage. For example, if you have a £100,000 mortgage taken out over 25 years with an interest of 6%, overpaying £100 a month will mean you pay it off six years and four months early, saving a gigantic £26,892.54. That works out at saving more than £1000 a year, making it definitely worthwhile.

Switching mortgage lenders can be appealing to some, especially if they offer a lower interest rate. In some cases this can be advantageous, but most will incur a charge for leaving early, which can counterbalance the savings. Therefore it is worth checking a mortgage early repayment calculator before making the switch.

Paying a lump sum cuts down on a lot of interest. For example, overpaying £50 a month on a £100,000 mortgage with a 25 year term and 4% interest, would mean it could be paid off three years and five months early, saving £9000 in interest. However, with the same terms but making a £50,000 lump sum payment, it would save £47,864 in interest and be paid off 15 years and five months in advance. Some lenders will not allow you to make such a large lump sum payment, but even a much smaller one will still significantly cut down on the interest.

Restrictions

Certain lenders have a minimum amount that you can overpay each month or in a lump sum, which will be included in your mortgage contract. Overpaying less than this amount will prove fruitless, as it will not knock any interest off until the end of the financial year.

Watch out for charges as well. In some places you have to pay an early redemption penalty if you go over permitted overpayments or pay it off completely in advance. In such instances it is worth using a mortgage early repayment calculator to see if you’re better off paying the charge and will save, or not.  

Other Considerations

Before making early mortgage repayments you should think about paying off any other outstanding debts, especially if they have higher interest attached. Credit, store cards and unsecured loans likely will, so it will be wiser to pay these off first before paying off more of your mortgage.

If you can afford it then making an early mortgage repayment makes sense financially. Use our House Network early mortgage repayment calculator to see what you need to achieve in order to save your penalty.

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