Should I pay off my mortgage early?

While paying off your mortgage ahead of time can be advantageous for some, it may not be the best option for you. Find out more below.

It's a question that crosses every homeowner's mind - especially if you’ve been squirrelling away your pennies, or have recently received a windfall or inheritance. The idea of living debt-free is certainly tempting, but is it the right move for you? You need to think about overpaying on your mortgage vs putting that money away in investments or savings.

Let's unpack the pros and cons to help you make an informed decision.

What are the benefits of overpaying on your mortgage?

Generally speaking, if your mortgage rate is around the same, or higher than your savings rate, then overpaying could be the right option for you.

If you can afford to make extra payments, overpaying your mortgage means you pay less interest in the future and pay off your debt sooner. This means you could save money, compared to the interest you would accrue on savings.

Become debt-free sooner

Overpaying on your mortgage will shorten your mortgage term, making you mortgage free sooner. This means more financial freedom and more disposable income each month, thanks to the fact you’ll no longer be paying your monthly repayments.

Make savings on interest

Paying off a chunk of your mortgage early can save you a significant amount of money on interest payments over the years.

For example, if you have a £250,000 mortgage at 5% with 25 years remaining, a £5,000 lump sum would save you £11,970 in interest over the remainder of your mortgage term. On top of that, it would also shorten your remaining repayment period by 11 months.*

Make savings when you remortgage

When you come to the end of your fixed rate period and you’re looking to remortgage, overpaying can help open better mortgage deals. Overpaying will benefit your loan-to-value ratio which lenders will consider when you are looking for a new mortgage deal.

Loan-to-value is the amount lenders are prepared to lend in relation to the value of your property. For example, if your property is worth £250,000 and you have a mortgage of £200,000, your loan-to-value is 80%, as the mortgage equates to 80% of the property’s value.

Increased equity

With your mortgage paid off entirely, you own 100% of your home, which can be a valuable asset for future financial plans and the future generations of your family.

Improve your credit score

Consistently making on-time mortgage payments, including overpayments, demonstrates financial responsibility and can boost your credit score over time. A strong credit score makes it easier to secure favourable rates on other loans.

What are my options for paying off my mortgage early?

There are two main ways to pay your mortgage off early: you can pay a lump sum in full or increase your monthly payments.

Overpaying your monthly payments may suit you if your household has an increase in monthly income. It can also be a good way to take advantage of low interest rates: paying off as much as you can while interest rates are lower means there’ll be less of your mortgage remaining to pay off, should interest rates increase. You should always speak to an expert before making these types of financial decisions. Please note that some lenders also may have limits on how much you can overpay each much, or impose an Early Repayment Charge.

What are the downsides to paying off your mortgage?

Less flexibility with your money:

Tying up your funds in your home means less cash on hand for emergencies or other investment opportunities. It is advisable that you have an ‘emergency fund’ ready in case of future issues. Think about how much money you can comfortably part with.

Could you make better investments?

The money used to pay off your mortgage early could potentially yield higher returns if invested elsewhere. Research different investment options and work out the most financially beneficial option for you. Some people like to put the cash down as a deposit on a second property and invest in buy to let.

Do you have other, expensive debts? If so, clear those first

If you have any, you should consider paying off more expensive debts first. Some forms of expensive debts, such as credit card debt, may come with a much higher interest rate than your mortgage repayments so it is advisable to pay these off before overpaying on your mortgage.

Questions to ask yourself before paying off your mortgage early:

Can I get a better return on my savings than paying off my mortgage?

An independent financial advisor will be able to explain alternative savings options for where to put your money, whether that be a pensions scheme, stocks or individual savings account (ISA)

How much can I overpay on my mortgage?

Typically most lenders will let you overpay by up to 10% of the outstanding mortgage balance per year.* If you go over this limit then penalty charges may apply. Each lender has its own criteria however so it is worth checking before you make any overpayments.

Considerations before making a decision

Before you decide to pay off your mortgage early, consider your overall financial situation. Do you have an emergency fund? Are you maxing out your retirement savings? What's the interest rate on your mortgage compared to potential interest from savings? Weighing these factors can help you decide whether paying off your mortgage early aligns with your long-term financial goals.

Which is the right option for you?

In summary, there's no one-size-fits-all answer to whether you should pay off your mortgage early. It's a personal decision that depends on your financial circumstances and objectives. Speak with our Mortgage Consultant to explore what's best for you, and remember, whether you choose to pay off your mortgage early or not, ensuring you're making informed financial decisions is what's truly important.