Should I Make Extra Mortgage Payments?

If you have a flexible mortgage, making extra mortgage payments can save you substantial sums – much more than the initial cost. Quite often, people don’t look upon a mortgage as debt and so are in no rush to pay it off. However, it is definitely a type of debt and is constantly accumulating interest. If you can pay off your mortgage early, it can be a good financial decision.

There are 2 ways to pay off your mortgage early.

  1. Making one off lump sum payments
  2. Making extra monthly payments.

The advantages of making extra mortgage payments can be seen in the above tables, which show the potential to save money and pay off your mortgage early.

Reasons to make extra mortgage payments

1. Pay off mortgage early.

When it is paid off you can put all your resources into investment and savings.

2. Save Interest

The interest on your mortgage is likely to be higher than most saving accounts. Therefore, it is best to pay off mortgage debt at 6%, rather than put into a savings account at 4%.

3. Guaranteed Saving

Stock Market investment has been quite volatile in recent years. Investing in the stock market means you could end up with less than what you started. Making extra mortgage payments is guaranteed to save you money. Speculate on the stock market after you have reduced your huge mortgage loan.

4. Reduce Capital Debt

All the extra payments goes on reducing the capital debt, rather than just paying interest on the loan. For example, in the beginning upto 95% of your monthly mortgage payment goes on just paying interest, very little actually goes on reducing debt.

Circumstances when it is not advisable to make extra mortgage Payments

1. You have other sources of debt.

If you have any other debt like secured or unsecured loans it is advisable to pay off these debts first. As long as the interest rate is higher than your mortgage, then this should be your first priority in debt reduction. For example, it makes no sense to make extra mortgage payments at 6% interest, when you have credit card debt at 17%

2. It is too much of a sacrifice.

Many young people buying a house, find that upto 50% of their income needs to go on paying their mortgage payments. This is because house prices have risen faster than incomes, making it increasingly difficult to buy a house. If you find yourself in this situation, don’t worry about making extra payments, otherwise you will be spending on nothing else other than your mortgage. Over time, it will become easier to make your mortgage payments (assuming you get an increase in real wages). Just remember, buying a house is better than the alternative of renting.

3. Tax benefits of Saving into Pensions

In the UK, at least, making payments into pensions gets a double benefit, because the government tops up your pension contribution with an effective tax rebate. This means that not only do you benefit from the investment of a pension, but also extra tax savings. Therefore, it would not be advisable to stop your pension, just so you can make extra mortgage payments. Mortgage payments should be in addition to a pension.

8 Responses to Should I Make Extra Mortgage Payments?

  1. plonkee August 24, 2007 at 1:19 pm #

    And this is where I disagree. If I pay extra on my mortgage, it won’t shave a great deal of time off my mortgage (so there’s no psychological benefit), whereas if I invest the extra money (less than £100 pcm) I can eventually choose to pay off the mortgage early or I can use the money for something else.

  2. Richard Pettinger August 25, 2007 at 1:18 pm #

    Hi Plonkee,

    Thanks for dropping by. As I don’t have any money to put towards mortgage or investment its a decision I don’t need to make at moment.

  3. Carnival of Smart Money #1 August 28, 2007 at 5:21 pm #

    R.Pettinger presents Should I Make Extra Mortgage Payments? posted at Mortgage Blog, saying, “Should we be making extra payments towards our mortgage or investing spare cash elsewhere?”

  4. Monevator January 12, 2009 at 12:13 pm #

    Well worth revisiting over-payments in 2009 methinks, especially if you’re on a tracker mortgage that’s followed bank rates down.


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