Mortgage rates are currently so low that it can seem reasonable to assume paying your mortgage off early is going to be of little benefit in the long run. However, many homeowners believe, and rightfully so, that the sooner you can be debt free in our unpredictable economy, the better. If you’re wondering whether paying off your mortgage early is a good idea, here are some of the things you need to think about.
Mortgage Repayments: 6 Important Points
Before deciding to pay off your mortgage, consider…
- Do you already have a ‘safety net’?
Current advice is that you should put away enough money to sustain your family for around three months, so that you can get by in the event of redundancy or illness or some other unforeseen circumstance. If you don’t have any nest egg to fall back on, it is worth setting this up first before thinking about paying off your mortgage early.
- Will you be charged if you pay more?
Make sure you understand any charges or penalties you will be liable for if you start to overpay on your mortgage. Lots of mortgage companies allow an overpayment of around 10 per cent a year without penalty, but find out your own situation so you can make an informed choice.
- Do you have other debts?
If you owe money on credit cards, store cards or even personal loans, chances are the interest rates on these will be significantly higher than on your mortgage debt. For this reason, it makes more sense to pay these off first than it does to start whittling down your low interest rate mortgage.
- Can you secure a high interest savings account?
Some savings schemes pay back more interest than your mortgage will cost you, which means it makes more sense to put your money here and watch it grow than it does to reduce your mortgage amount. Work out what you could get from saving the same amount of money, including any tax liability on the interest, and compare this to what you’ll be saving on your mortgage in the long run.
- Do you pay into a pension?
Pensions are a great way to save for the future, and are one of the most tax efficient methods of putting money aside. If you have a company scheme available, they can become even more attractive as your employer may pay into them too. If you have no pension savings, aim to start saving as soon as you can so you can live comfortably in retirement.
- What would happen to your family if you passed away?
If you have dependents, you might be tempted to pay off your mortgage early so that they have a house with no debt to live in. However, it could give them more security sooner if you were to take out a generous life insurance policy, so that if the worst happened they would all be taken care of well.
Paying more into your mortgage than the minimum is, in theory, a great idea. For example, a mortgage with £150,000 owing at a rate of 5 per cent could be paid off 18 months earlier and at a saving of £11,500 by paying in a lump sum of just £5,000. Paying more while rates are low means you can avoid having a large, unaffordable mortgage later on if and when interest rates rise again.
Finally, make sure you know at what point in the year your interest is calculated, so that you can make the payment at the right time to avoid the maximum interest charges.
For an informal chat about your current mortgage arrangements, and whether you personally would be better off reducing your mortgage now, please contact me. Call me on 01252 759 233 or email firstname.lastname@example.org