Paying off your mortgage early – the pros and cons
Posted 29 January 2016 by Nick Parkhouse
The idea of repaying your mortgage and owning your home outright is hugely appealing. As well as ensuring that you don't have to make any more monthly payments, paying off your mortgage gives you the security and peace of mind of knowing that your home is finally yours.
However, there can also be downsides to using your savings to repay your mortgage. Our guide looks at all the pros and cons of paying off your mortgage early.
The advantages of paying off your mortgage early
Paying off your mortgage either through overpayments or a lump sum would seem to have lots of advantages.
Firstly, using your extra money to repay your home loan could have financial benefits. In many cases, the interest that you will be paying to your mortgage lender will be higher than the interest rate you can earn on your savings. In simple terms, this means it is more cost effective to pay off the loan at a higher rate than it is to generate interest at a lower rate on your savings.
This is particularly true if you are taxpayer. For example, if your mortgage interest rate is 4%, a basic rate taxpayer would need to find a savings account paying 5% to achieve a higher interest rate than what they are paying on their mortgage. A higher rate taxpayer would need an account paying 6.7% while an additional rate taxpayer would need an account paying around 8%.
Paying off part or all of your mortgage early is also useful if you come to remortgage or move at a later date. If you have reduced the loan-to-value by repaying part or all of your home loan, you will be able to access much lower interest rates if you do have to borrow in the future. Many lenders offer their best rates to consumers looking for less than 60% loan-to-value.
Paying off your mortgage early can also have psychological benefits. You shouldn't underestimate the security and peace of mind you will feel knowing that you don't owe your bank any money and that you own your home outright.
Why you might not want to pay off your mortgage early
While there are lots of reasons you may want to repay your mortgage early there are also a number of factors you should consider.
The first is whether you will incur any charges for paying off your mortgage. If you are on a fixed or discounted rate deal you may have early repayment charges for paying back your loan early. Check with your lender if they will levy any fees and, if they will, you might want to wait until your special deal has expired before making your repayment.
Another factor you should consider is whether you can pay off any more expensive debts before you repay your mortgage. If you have any personal loans, credit cards or store cards then it is likely that the interest rate on these is higher than it is on your mortgage.
It therefore could make financial sense to repay your more expensive debts before you pay off your mortgage.
If you want to commit a lot of savings to repaying your mortgage then you should also bear in mind that your spare cash will then be tied up in your property. Experts recommend retaining some cash readily available as an 'emergency fund' because if you do need any money at a later date you may have to remortgage.
Remortgaging can take time and with stricter lending criteria, it may not be as easy as you think to release the cash you need.