Is now the time to repay your mortgage early?
Repaying your mortgage early can save you substantial amounts in interest payments and could be a great financial investment at present. With interest rates at their lowest in decades now maybe the time to increase your mortgage repayments or consider paying off a lump sum.
Before you arrange to make overpayments it is important to check a few details, do your homework and understand the pros and cons whichever type of mortgage you have and/or are considering.
Flexible mortgage repayments
Flexible mortgages can seem like a distant memory for those looking for new mortgage products at present but many people were able to secure these deals in the past.
If you have a flexible mortgage it is generally good news if your are looking at making overpayments as the related charges are often very small or non existent. If you secured a flexible tracker mortgage 2+years ago, it must feel as if it is your birthday and christmas rolled into one every day at present.
Check your mortgage terms and conditions
Some mortgage terms and conditions include early repayment or redemption charges so it is important to check your specific mortgage product. These may occur if you decide to repay all or part of the original mortgage. Charges normally come as one of the below:
- A certain number of months interest ( e.g. 3 or 6 months)
- A percentage (%) of the total amount already repaid
- A percentage (%) of the initial mortgage amount (the amount first borrowed from your lender)
- A percentage of your current mortgage balance (the amount presently still owed on your mortgage account)
Types of mortgage overpayment fees
There are generally 2 types of mortgage overpayment fees that maybe within your specific mortgage:
Mortgage Redemption Fee – this is the fee you pay after you have paid off your mortgage. These fees can and often apply whether you have paid it back early or not. These fees can vary considerably in amount and they are often unavoidable.
Early Mortgage Repayment Fee – as the name suggests, these fees apply to borrowers who pay their mortgage back ahead of the intial time scheduled. These fees can vary quite alot and may not always exist, especially if your mortgage is a standard variable rate.
Timescale of mortgage fees – can also vary and may only apply for a certain period for example the length of time of a fixed rate mortgage.
It is imperative to speak to your lender and check the details.
Once you have found your specific mortgage details out, it is important to formulate a plan of action and then sticking to it. Some of the ways people practically carry this out vary but some of the better strategies are:
- Regular overpayments set up via direct debit or standing order
- Using irregular overtime or bonus payments
As an example, if you overpaid £100 per month on a £100,000 mortgage taken out over 25 years with a 4% interest rate. The mortgage overpayment results would be similar to below:
Current payment amount: £ 527.84
New payment amount: £ 627.84
Time saved: 6 years 0 months
Interest saved: £15,535.10
With these types of savings to be made it is no wonder we have seen an increase of overpayments being made and recent reports within the industry to support this.
Britons repay mortgage debt at record level – (Financemarkets.co.uk)
Britons pay off record £8.1bn on mortgages – (Times Online)
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If you have seen you mortgage payments reduce with the interest rates and you have additional disposable income there may not be a better time to look at this area more closely.
As ever, we look forward to your comments and hearing about your experiences and strategies on this subject.
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