Shrink Your Mortgage
Save Your Money By Paying Off Your Mortgage Early
A mortgage is a massive financial commitment. Here is a way in which you could save a bundle on an average mortgage – simply by making a few extra payments.
Taking out a mortgage to buy a property is one of the greatest financial undertakings most of use will ever take on, but if you play it right you could be much better off than most.
But even though we might be tied to making regular payments for as much as 25 or 30 years, few people really explore all the options available to them but this is a great way to save some money on your mortgage.
One of the best ‘mortgage shrinkers’ is to make extra payments by doing this you slash years off your mortgage and reduce the total cost of the mortgage by tens of thousands of pounds.
How Much Can You Save By Making Extra Payments?
The basic principle behind paying off your mortgage early is that by making extra payments – either once a year, once a month or every four weeks- you’ll reduce your mortgage term
The table below highlights how much you can save on a £70,000 25 year repayment mortgage (at a rate of 6.5%) by increasing your monthly payments, or making extra lump sum payments. For example by putting an extra £50 a month towards your mortgage you will reduce the term by over 5 years and save your self £16,725 on the overall cost.
By increasing your total monthly rempayment even further to £573 (by making monthly overpayments of £100). You’ll pay off your mortgage in 8.3 years less than if you didn’t overpay at all, and save nearly £27,000 overall into the bargain!
When Is It A Good Idea To Make Extra Payments?
Making extra payments on your mortgage is actually an extremely cost effective way of making savings. You’ll see from our example that by paying an additional £25 a month on your mortgage you will save nearly £9,600. This is, of course far more cost effective than investing that extra cash in a high interest savings account for the same period.
A major consideration is whether you can find enough cash to make extra payments. If you normally like to put ‘spare’ cash in the bank ‘for a rainy day’ your likely to benefit more by using it to payoff your mortgage instead. But always make sure the money is ‘spare’.
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What outgoings and debts do you have?
Your mortgage may not be the only debt on which you’re being charged interest. For example, you may have a personal loan or owe money on a credit card. Its better to pay these off before paying money into your mortgage as normally these have a higher interest rate than your mortgage does.
Always check first that your lender allows you to pay off a personal loan early. You could trim expenditure in other areas to raise extra cash for your mortgage, but make sure this doesn’t leave you stretched.
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What savings and investments do you have?
If you have savings and investments check to see how much you are earning in interest as you may find that you are better off using it to pay off chunks of your mortgage. The basic rule of thumb is that if the inflation rate is lower than the base lending rate you should give priority to paying off debts rather than investing. However, if the inflation rate rises above the lending rate, paying off loans isn’t such a high priority. This is because the value of the debt is being eroded faster than the interest payments are building up.
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How much of your mortgage have you already paid off?
If you are nearing the end of your mortgage term it may not be wise to use extra capital to pay off your mortgage. It will save you mortgage interest only for a few years, whereas a lump sum could be invested to earn an income for the rest of your life.
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Will your mortgage lender let you increase mortgage payments?
Before you increase mortgage payments check that your lender allows you to do this. Some are more flexible than others. Watch out for early repayment penalties.
5. Do you have a discount-rate or low-start mortgage?
Some mortgages have fixed low interest rates for the first year(s) – for example a low start mortgage pegged at between four or five per cent for the first year or two.
If you have such a mortgage you will probably gain more by investing any extra cash in a high interest savings account until the low start period runs out.
6. How regularly is interest calculated on your mortgage?
This is an important factor in determining how and when you make extra payments. If your mortgage is not of the flexible mortgage type, it’s likely that your lender will recalculate the mortgage interest once a year. If this is the case don’t pay your lender any cash as it wont have any effect until the end of the year.
Instead, pay into a high interest earning bank account every month, then make a lump sum payment at the end of the year, shortly before the interest on your mortgage is re calculated, use the money to pay off your mortgage. For instance, if interest is recalculated on January 1, make the payment mid to late December. This is sometimes known as a ‘donor account’ approach.
The crop of flexible mortgages recalculates interest either daily or monthly. Although there are some disadvantages, the main advantage is that extra payments you make will reduce your mortgage interest, and hence the overall term and cost, almost instantly. So if you are in a position to make occasional or regular extra payments, a flexible mortgage could allow you to save a lot of money.
Finally, remember that saving money on your mortgage in this way could be the biggest financial saving you ever make, but be sure to consult your lender, or even an independent mortgage advisor, before you make any extra payments.