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Ways to pay off your mortgage early

Paying off your mortgage feels good.

Here, we explain some of the ways to do it and what you’ll need to consider.

How much extra can you pay?

You may be able to make mortgage overpayments up to a certain amount each year, without having to pay a fee. This will depend on the type of product you have, and will vary between lenders.

Before making an overpayment, check with your mortgage lender so you can avoid any potential early repayment charges (ERCs).

  • if you are on a fixed rate of interest – your lender may allow you to pay up to a certain percentage of your loan balance each year without having to pay an ERC. This is known as an annual overpayment allowance (AOA). If you go over your AOA, you may need to pay an ERC
  • if you are on a variable rate of interest – your lender may let you make as many overpayments as you want, without incurring an ERC

This isn’t the case for every lender, so check how much extra you can overpay on your mortgage first.

How to make overpayments on your mortgage

Any extra money you pay into your mortgage, on top of your usual repayment, is known as an overpayment. There are a few ways you can make overpayments:

1. Regular overpayments

You can make a regular overpayment in two ways:

  • ask your lender to increase your Direct Debit amount each month
  • set up a standing order to make additional repayments each month

For example, if your mortgage payment is £800 a month and you decide to increase this to £1,000, by Direct Debit or by setting up a standing order, this is an overpayment of £200.

As an overpayment isn’t part of your standard (or contractual) mortgage payment, you can amend or cancel the overpayment when it suits you.

2. A lump sum

If you want to pay more off your mortgage but would rather do it now and again, as opposed to every month, you could consider making lump sum payments.

If you’re unsure about whether you can make overpayments, how you make them, or which method to use, you can check this with your lender.

Most lenders will let you set up a Direct Debit, or transfer a lump sum to your mortgage account online or over the phone.

What are the benefits of making overpayments?

With a repayment mortgage, your standard monthly payment goes towards paying off the interest that’s accrued on the capital balance of your loan since your last monthly payment, as well as reducing the balance.

Overpayments go directly to reducing your mortgage balance (assuming that your account is up to date and there are no arrears). This can have a few key effects, such as:

  1. A lower mortgage balance means you’ll pay less interest. Depending on the lender, this could be from the date you make the overpayment so the benefit is immediate.
  2. As your balance reduces quicker, it could mean your mortgage term is shortened – meaning you can pay your mortgage off quicker.
  3. If the mortgage terms shortens, you won’t be paying interest for as long, which could save you money.
  4. With a smaller mortgage balance, you’ll have a lower loan to value (LTV) ratio. If you switched mortgage rates or remortgaged to a new lender, this could mean you’d be eligible for lower rates.

What do you need to consider when making overpayments?

Making overpayments on your mortgage to help pay it off early can be a good idea, but there are things you need to consider:

Can you make overpayments?

If you have an AOA, making overpayments could save you money in the long run, but you’ll need to make sure you stay within the limit to avoid an ERC.

Do you have other expensive debts to pay off?

Loans, credit cards and overdrafts tend to have higher interest rates than mortgages, so you may want to consider paying these debts off first, if you have them.

Have you saved an emergency fund?

It can be a good idea to build up some savings to use for emergencies before paying extra off your mortgage. Ideally, you should have around 3 to 6 months’ worth of living expenses to cover any unexpected costs. That way, you’re less likely to need to borrow money to cover them.

Think carefully before securing other debts against your home.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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