Should homeowners pay off their mortgage early?

Posted 9 May 2016 by Helen Christie

With the lowest mortgage rates of all time, there is only one way they can go, and that's up. So if you are in a position to pay off your mortgage – should you do so?

It all depends on your circumstances and your future plans. Paula Higgins, CEO of HomeOwners Alliance has put together some suggestions to help you make your decision...

What is the main reason to pay off my mortgage early?

It will probably leave you better off in the long run. Generally, if you have debts (such as mortgages), the best thing to do with your savings is pay off those debts, because with rare exceptions, mortgage rates are higher than savings rates. Being mortgage-free can make it easier to downsize in other ways – such as going part time – and usually makes it cheaper and easier to buy and sell your home. Generally, a smaller mortgage gives you greater freedom and security.

What is the biggest reason not to pay off my mortgage early?

Opportunity cost. The money in your savings account is yours to do what you like with. Once you have paid off the mortgage, it will be difficult to get the money back again, unless you go through the hassle and expense of taking out a new mortgage, which might be difficult since lenders have been tightening their conditions.

How do I work out how much money I will save by paying off the mortgage?

Ask your lender what your monthly interest payment is, or calculate it from the interest rate that you are paying. Then find out what interest you are receiving on your savings, and how much tax you are paying on that (the first £1000 of interest is tax-free for lower rate tax payers, while top rate taxpayers pay 45% tax on all interest received).

If your monthly mortgage payment is greater than the interest you are receiving after tax, you will be better off paying off your mortgage.

Will I be better off using the money to buy something else?

It is possible (but unusual) that you can be confident of earning more from using your savings in some other way than paying off the mortgage, and investments like a second property or stocks and shares come with a risk.

How do I find out about any penalties?

Ask your lender if there are any penalties, and if so how much are they. Normally, the penalties decrease towards the end of a fixed rate or discounted period. Often you can pay off a certain amount – such as 10% - a year without incurring penalties. If the penalties are small, it might still be worth paying off the mortgage early.

Do I have to pay off the whole mortgage?

No – often you might just want to make a capital repayment that only partially pays off the mortgage. All the same arguments about being better off doing this still apply. Even if you have enough money to pay off your whole mortgage, you should still try to keep some aside as a rainy day fund.

Will paying off my mortgage affect my ability to move home?

If you are moving to a similar priced, or cheaper, property where you will also not need a mortgage, then it makes it easier and cheaper. But if you have a portable mortgage, and would need the mortgage on a new more expensive home, then it might be best just to stick with the mortgage and use your savings to increase the deposit you are paying on the new home.

Should I accept my parents offer to pay off my mortgage and for me to pay them instead?

It depends; what interest will they charge and how well you get on with them? If they charge less interest than the mortgage company, then clearly you will be better off. It also can help to “keep the money in the family” – you can often reach a deal where both sides are better off. For example, if you are paying 3% interest to the mortgage company, and they are earning just 1% interest, then if they lend to you at 2%, both you and your parents would be better off. But of course there are potential risks so you both might want to get independent legal advice.


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