What are the pros and cons of paying off your mortgage early
For all parents, planning for your family’s future is vitally important. Paying off your debts as early as possible can be the best financial move. So when it comes to possibly the most significant debt you will ever have, your mortgage, is it better to pay it off early or save?
What’s the upside to overpaying on your mortgage?
If you are in a position to overpay now or clear your mortgage early, the benefits can be outstanding. It means that you will save in the long run.
If you can make manageable overpayments on your mortgage, you will pay less interest overall. As your interest is determined by the outstanding amount on your mortgage, reducing this amount as much as possible lowers the interest payable on your mortgage. For example, even if you can overpay by £10 a month, you could save £2,000 overall.
But is this better than saving your money? To understand the answer, it would help to calculate whether your mortgage rate is higher than the interest you can earn after-tax in savings. Often, the saving you make on interest when overpaying your mortgage beats a savings account.
Possibly the most outstanding benefit of overpaying on your mortgage is the emotional peace of mind in being debt-free sooner, giving your flexibility and more security when planning for your family’s future.
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What’s the downside to overpaying on your mortgage?
The most significant downside to overpaying on your mortgage is the early repayment charges imposed by mortgage providers. The first step is to talk to a mortgage adviser to understand the terms and conditions of your mortgage and what a penalty would cost you.
You could potentially earn more in the long run by investing your money rather than paying off your mortgage early. For example, the average return on investment over a period of ten years could be as high as 9%. But of course, this comes with its own risks.
One argument for saving any extra money you have rather than overpaying your mortgage is for unexpected events, such as a job loss or a family emergency. It may be prudent to set extra savings aside for an emergency fund before you consider making mortgage overpayments.
Create a plan to pay off your mortgage early
Consider if you have other debts, like high-interest credit cards, that need paying off first. The next step is to speak with a mortgage broker who has all the expert knowledge you need. They can help you understand what early repayment penalties apply to your mortgage. A mortgage adviser can also help you find the right mortgage at the best rate of interest. For example, use an online mortgage calculator with a mortgage broker like Trussle to figure out your mortgage payments. Many British homeowners pay up to £4,700 a year more interest than necessary. Make sure you are not one of them.
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Even overpaying on your mortgage by very slight and feasible amounts consistently over time will make a big difference. For example, why not increase your mortgage repayments by £1 a month? Small increases could reduce your mortgage term by years.
While overpaying on your mortgage has many upsides, it is essential to understand whether the fees outweigh the benefits of overpaying. So make sure you do your homework and get some expert advice before making a final decision.