Mortgage repayments are one of the most stressful financial responsibilities in a person’s life. It causes headaches for any property owner – and when the opportunity arises to get this stress out of your life, many people go for it.
However, paying off your mortgage early is not always the best idea. Whether you should consider doing so depends on a number of different factors – and in the blog below, we have outlined what these might be.
So, read on for an in-depth look at the pros and cons of paying off your mortgage early.
What does it mean to pay off your mortgage early?
When someone pays off their mortgage early, it means that they have provided all the money required to pay back the loan, before they were required to do so.
It is likely that paying back your mortgage early will divert money away from other parts of your finances. This is because it will require significant sums of cash, even for the most inexpensive properties.
Advantages of paying off your mortgage early
There are several advantages to paying off your mortgage early, which is why many people aim to do it.
Firstly, paying off your mortgage early can provide significant peace of mind. Repaying a mortgage is one of the biggest stresses in any person’s life – and therefore, if you can get it paid off early, it relieves a huge amount of stress.
Paying off your mortgage early also provides long-term financial advantages, because you can save money on future interest payments. Depending on how early you are able to pay off your mortgage, it could potentially save you thousands of pounds.
Thirdly, you will own the property outright if you pay off your mortgage early. This means that there is no chance of your losing the house – and when the time comes to sell (if you choose to do so in the near future) more of the money raised from the sale will be going straight into your pocket.
Disadvantages of paying off your mortgage early
Unfortunately, there are drawbacks to paying off your mortgage early, too.
Firstly, you can sometimes be charged for overpaying your mortgage. If the repayment goes over your agreed monthly limit, then there can be a penalty. You should check your mortgage deal to find out if this will be the case – but as a general rule, lenders will let you overpay up to 10% a year without penalties.
If you have other debts, then sometimes using your finances to pay off your mortgage early may not be the smart decision. This is because some smaller debts could be at a higher level of interest, meaning that you are better off focusing on repaying those debts.
Finally, when you dedicate a significant sum of money to paying off your mortgage early, it typically means that you have less funds to put aside for other things, such as early retirement, or an emergency fund.
Methods for paying off your mortgage early
There is more than one way to pay off your mortgage early. Three of the most common methods of achieving this include:
- Increasing your monthly repayments
- Paying a lump sum
- Reducing your mortgage term
Each of these is relatively self-explanatory. For the first option, mortgage lenders often allow you to overpay by up to 10% of the remaining balance a year without incurring a penalty.
For the second option, paying a lump sum can be a quick way of getting your mortgage repayments ‘out of your hair’. However, gathering enough funds to make this possible is extremely difficult for most people.
Thirdly, reducing your mortgage terms means that your monthly mortgage repayments would increase, but it could sometimes work out cheaper than paying the early repayment penalty.
Keep in mind that there are additional ways to pay off your mortgage early, such as switching to an offset mortgage. You should conduct thorough research on all the possibilities before deciding on the best route, and should also speak to independent experts who can guide you.
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