Should I pay off my Mortgage Early?

If we want to save money paying off our mortgage early can save us potentially £1000s in lower interest payments.

Advantages of paying off a mortgage early.

1. We save from lower interest charges. The total interest payment on a 30 year loan will be much higher than a 20 year loan. There is also a cumulative effect because we are in practice paying interest on our interest payments. See this example:

Suppose you have a standard £165,000 mortgage at 6%.

• On a 30 year mortgage term you will pay £986 a month and pay £191,131 in total interest.
• On a 20 year term would have a monthly payment of £1182, total interest payments would be: £118,000
• If the mortgage term was only 10 years Monthly payment would be £1,811. Total interest payments would only be: £54,200

2. Invest Later.

Once a mortgage is paid off, we can devote more resources to a pension plan and savings.

3. Own house sooner.

It is a good feeling to be able to get rid of our debt and own the house. As we pay off more of our debt we are much less vulnerable to negative equity.

Paying off a mortgage is probably a better financial decision than other types of investment. If you do have money to spare, you have a choice; either reduce your mortgage debt or invest it in other schemes like stock market. The stock market may give better returns, but it is not guaranteed. By paying off your mortgage early, you are guaranteed to save money. When it is paid off is maybe a better time to consider increasing your asset portfolio.

What is the best way to pay off a mortgage early.

1. Current account mortgage. These are an increasingly popular form of mortgage. Basically, it is a way of combining your current account with your mortgage debt. Higher savings are automatically used to reduce mortgage debt and therefore reduce mortgage payments. They are particularly beneficial for higher tax brackets. This is because you will save on not paying tax on interest from your current account. A current account will not work if you have no savings.

2. Flexible mortgage. A flexible mortgage is essential to be able to pay off your mortgage early. This enables you to make one off payments to reduce the mortgage capital, without incurring any charges. Some flexible mortgages may also enable a payment holiday if you have made several overpayments.

3. Mortgage Cycling. There are various variations of this; however this is a scheme where you commit yourself to paying off the mortgage debt early. It means that you have a strict target to pay an extra payment every 6 months. If necessary, you can take a secured loan to pay off the extra mortgage payments. It is quite risky and requires careful planning.

See: How to pay off mortgage early

Why I increased my mortgage term from 32 years to 47 years.

Despite the undoubted financial advantages of paying a mortgage off early, it doesn’t mean it is a good thing for everyone. The first problem is that for many first time buyers, it is hard enough to keep up with the minimum mortgage payments, let alone paying extra. This is a consequence of house prices rising much faster than incomes. With mortgage payments reaching upto 40% of disposable income, (in London UK) it would be a real sacrifice to consider trying to pay off your mortgage early. My philosophy is that buying a house is better than renting. Therefore, although I will pay extra interest over the course of a 47 year term I am happy to do that. Personally, I value money now.

Benefits of a 50 year Mortgage