Five years, ago, I took out my very first mortgage and bought a three bed flat over the next thirty years. Interest rates were low, so I opted for an index tracker that hasn’t moved since. One of my favourite features about that mortgage is the ability to make small repayments whenever you feel like it, without having to pay a fee. Seriously, you can send £0.99 every week, if you skip the candy bar at the office and want to put the money towards the mortgage. The only thing is the bank send me a letter every time, so I try to make it worth the postage, and usually make payments over £10. Still, those micro payments over the past five years have already helped shred two years off the mortgage.
Why would you pay your mortgage early? Well first to have the freedom of knowing you can afford to lose your job, take time off to be with the kids or work on a side project, and not have to worry about paying off your house. If you are approaching retirement, as this Saga report suggests, it can also be a good time to try to be mortgage free, before your income drops down.
There are many ways you can pay off your mortgage, from using your pension to renting a room or putting any unexpected windfall towards the mortgage. As I moved into my property, my housing costs dropped. I took a roommate, and my share of the mortgage was lower than what I used to pay in rent. One idea was to keep paying my old rent amount towards the mortgage, which would have meant an overpayment of £200 per month, shortening the life of the loan by 15 years. I had other financial priorities at the time so instead decided that any small amount left at the end of the month would go towards the mortgage.
There are several things I like about overpaying the mortgage:
It is a safe return. When you invest in the stock market, you may get a 12% return, or a –38% return. When you decide to pay your mortgage off, you get the guaranteed return of the interest rate you were paying. Paying off a 3.5% mortgage is a better return than keeping the money in a 0.5% savings account.
You can always stop. Unlike refinancing a mortgage with a shorter term and thus a higher monthly repayment, you can adapt your extra payments to your current financial situation. You can put your Christmas bonus towards the mortgage and pay a year upfront, or you can stop for a few months if you need to buy more important things.
You can even stop paying for a while. Not all banks will allow that, but mine will. If I have overpaid six months worth of mortgage, they will accept that I stop paying my mortgage for six months, accruing just the interest that I had previously saved. I hope to never have to use it, but in case of an emergency it is good to know I have options. Just check previously with your bank how that setup works, otherwise you may damage your credit score by stopping payments without a warning to your lender.
There are a lot of mortgage calculators out there that will tell you how much money and years of repayments you can save by adding a small extra payment to your mortgage each month. While £25 or £50 per month may not seem like much, over the course of 30 years it really adds up!
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