Should you pay off your mortgage early?

Money Advice Service

With mortgage interest rates so low, some argue that there’s no point in paying off your mortgage early. Others argue that paying off debt is always a good idea in an uncertain economy. We weigh up the options, so you can decide.

Read a transcript of this video

Early mortgage repayment – Questions to help you decide

Should you save or pay off your mortgage early? Answer these questions to help you decide.

1. Do you have any other more expensive debts?

Expensive debts are those which cost a lot to pay off over time.

Credit cards and store cards, for example, charge a high rate of interest over the course of a year.

Other examples might include unsecured loans, where the interest rate is significantly higher than the cost of your mortgage borrowing.

Always pay off more expensive debts before thinking about reducing your mortgage – but don’t rack them up again.

2. Are you putting money into a pension scheme?

Top tip

On a £150,000 mortgage at 5% with 25 years remaining, paying off a £5,000 lump sum will reduce the interest by £11,500 and the repayment term by 18 months.

Pensions are a tax-efficient way to save because the government tops up your contributions with tax relief.

And, if you have a company scheme your employer might pay into the scheme too.

If you don’t have a pension and have money to spare, it’s important to think about paying into one.

The earlier you start, the sooner your retirement pot will start to grow.

So think about this before deciding to use your savings to pay down your mortgage early.

It’s also worth taking stock of any existing pensions you have to see if it’s worth paying more into them.

3. Could your family cope financially if you died?

Do you have dependants? The cost of putting in place life assurance is relatively low – if you’ve not got this already and have a family or other dependents then now’s the time to think about it.

4. Can you get a savings rate higher than your mortgage interest rate?

If you’re already contributing to a pension scheme, rather than pay off your mortgage it might make more sense to put your money into a savings account.

That’s if you can find one which pays a higher rate of interest than the rate you’re being charged on your mortgage.

To get an accurate comparison, work out what the rate amounts to, after you’ve paid tax on your savings.

Some savings accounts – such as ISAs or some National Savings & Investments accounts offer tax-free returns you can benefit from.

Other things to consider if you want to pay off your mortgage early

Keep some money in reserve

Ensure you have saved enough money to keep you going for at least three months before paying off your mortgage early.

Will you be charged for overpaying your mortgage?

Check your mortgage deal to get an accurate picture of how charges can cut into any savings, which result from overpaying your mortgage.

You could be charged for paying your mortgage off early or making a monthly payment, which goes over your agreed monthly limit.

Many lenders will let you overpay up to 10% a year without penalties.

Do you have a flexible or offset mortgage?

Flexible mortgages – including offset mortgages – allow you to overpay your mortgage and then draw back the money if you need it – all without charge.

The benefits of overpaying your mortgage

If you overpay your mortgage it doesn’t just mean you have less to pay in future years, it might mean that you can pay your mortgage off sooner – sometimes even years earlier.

On a £150,000 mortgage at 5% with 25 years remaining, paying off a £5,000 lump sum reduces the interest by £11,500 and means you repay 18 months earlier.

Overpaying when interest rates are low means you’ll have a smaller mortgage to be charged the higher interest on.

If you decide to overpay your mortgage

If, after weighing up all the facts, you decide to overpay, then you need to time it right.

If your mortgage interest is charged daily, then the sooner you make the overpayment the better.

If it’s charged annually, then you need to time your overpayment so that it counts towards the calculation of the interest for the year.

This article is provided by the Money Advice Service.

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Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
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We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

Some important information about Rest Less Money

We want you to understand the positives, but also the limitations of using our site. We operate in a journalistic manner and therefore all information, guidance or suggestions provided are intended to be general in nature, and you should not rely on any of the information on the site in connection with the making of any financial decision.

When we set out to build Rest Less Money, we wanted to be a trusted place where you could find helpful information about financial matters affecting the over 50s. As a free to use resource, we try hard to provide the best information we can, but we cannot guarantee that we won’t occasionally make mistakes. So please note that you use the information on our site at your own risk, and we can’t accept liability if things go wrong.

Key things to remember when using Rest Less Money:

We do not offer financial advice – As a journalistic site, it’s important to know that we do not provide financial advice. You should always do your own research before choosing any financial product so that you can be certain it is right for you and your specific circumstances. If you are in any doubt, please seek professional financial advice from a regulated financial advisor.

No Liability – please note that you use the information on Rest Less Money at your own risk and we can’t accept liability for how you choose to use the information given on our site. We will often provide links to content or products and services available on other third-party websites. These are provided purely for your convenience and we cannot be held responsible for any content, or any of the products and services offered on any website that we link to.

 

Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
Whilst we work hard to try and provide accurate information, deals and prices can change, so whilst they may be correct at the time of writing, providers may subsequently decide to alter them later – so always double check first.

A final note on the Rest Less Community Forums – always remember that anyone can post their opinion on the Rest Less Community Forums, so it can be very different from our own opinion and may not be factual or well researched. Always be wary of any content posted on the forums and be sure to do your own research and due diligence on anything suggested. 

We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

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