If you have opted for a mortgage, you might be on the lookout to get rid of all debts swiftly. Paying off a mortgage over a long time means that you have to deal with interests and be concerned about the next repayment schedule.
With 25 years being the average mortgage term, even a low interest rate implies that you must shell out thousands of pounds in interest alone.
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Settling your mortgage fast can minimize those interest payments throughout the mortgage term. Here are 5 useful ways to pay off your mortgage swiftly and save on interest –
1. Shorten Your Mortgage Term
Shortening your mortgage term means assuring your lender that you will repay what you owe in a shorter period.
To understand this strategy, here is an example –
You get a £200,000 mortgage with a 3-year fixed rate that offers 2.5% over a 25-year term. At the end of three years, you will have 22 years on the mortgage after repaying some interest and still owing £188,187.
When you would be at this point, it would be straightforward to get the cheapest 22-year mortgage out there, or you could receive a mortgage with 20 years instead.
By brushing two years off the term, your monthly payments will escalate from £928 to £997. However, you will save £5,522 in interest over the mortgage term in the long run (if you switch to a new mortgage deal that offers an interest rate of 2.5% every two years).
If you could brush away two years off your term every time you remortgaged, you could get rid of your mortgage within 14 years. You could also consider reducing your mortgage by a year, or not at all when remortgaging. This decision rests on your financial situation.
2. Overpay Your Mortgage
Overpaying your mortgage means that you pay more than the necessary amount each month. This strategy will only be applicable if your lender allows overpayments on your mortgage.
For instance, you get a £200,000 mortgage with an initial interest rate of 2.5%.
Considering that your interest rate stays fixated at 2.5%, your monthly repayments will amount to £897, and you will get rid of debt after 25 years. If you can overpay by £100 each month, you will escalate your monthly payments to £997.
However, this will imply that you will avoid having to pay £9,953 in interest and brush off three years and four months off the term of your loan.
Most mortgages typically let you overpay up to 10% each year without penalty; however, it is vital to go through your paperwork or inquire about this with your lender.
You should also notify your lender that you would want the overpayments to truncate your debt tenure rather than alter your monthly payments, or you will not get rid of the mortgage any faster.
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Unless you decide to remortgage to cheaper deals across your mortgage term, you will inevitably end up on the standard variable rate (SVR) levied by your lender.
The typical SVR lies at 3.57%, whereas the average 2-year fixed-rate mortgage amounts to 1.42%. This statement implies that you will have to pay a higher interest at the end of your two-year fixed-rate deal.
For instance, let your mortgage be £200,000 and fixed at 1.42% for three years on a 25-year term. After three years, you go back to the 3.57% SVR imposed by your lender and remember that variable-rate mortgages can fluctuate.
Without ever remortgaging and assuming that the rate stays fixated at 3.57%, you will have paid a whopping £293,436 by the end of the mortgage.
If you remortgage to another 1.42% fixed-rate mortgage and keep this up across your remaining 22-year term, your entire payment would be £237,733.
This calculation implies that you will have saved a staggering £56,000 in interest by merely switching mortgage deals after a couple of years.
Even though remortgaging can save you a substantial amount, it might come at a cost in terms of fees, time and loads of paperwork. Therefore, you must weigh up the pros and cons carefully.
4. Get an Offset Mortgage
If you decide to remortgage, you can benefit from an offset mortgage. An offset mortgage links your mortgage and your savings account with the same lender. Your cash savings become offset against the outstanding debt, so you pay a lesser amount in interest.
Let’s assume you get a £200,000 mortgage and have £10,000 in savings. In this scenario, your £10,000 ‘linked’ savings will cut down your mortgage by the same figure, implying your debt plummets to £190,000 (£200,000 minus £10,000).
As monthly repayments are based on the total debt (£200,000), you pay less interest and overpay your mortgage with no penalty, implying that you could be rid of your mortgage sooner.
5. Pay Fees Upfront
Mortgages with alluringly low-interest rates advertised often charge high fees, sometimes as high as £2,000. It is typical to pin these fees on to the mortgage sum to avoid paying them upfront.
By doing this, you potentially mitigate your chances of paying off your mortgage early since your monthly repayments will escalate.
However, if you decide to pay the fees in a lump sum at the beginning of your mortgage, you will have to pay less interest throughout and are more likely to be able to overpay (within the limits as dictated by your lender).
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Paying off your mortgage swiftly demands an enormous amount of capital, which will divert funds from the rest of your finances. The steps mentioned above can help shave years off of your mortgage repayment tenure and help you avoid enormous sums of interest.
Before you commit all of your savings, be sure to consult your lender and revisit your bank statements to evaluate if you can escalate the repayment process.