Are you thinking about paying off your mortgage early?
Being in the position to pay off your mortgage early is a wonderful thing. But before you take the plunge, it’s important to consider whether this is the right move for you.
Everybody’s situation is different. It’s essential to weigh up the financial advantages and disadvantages for you and your family, before making an informed, balanced choice.
1. The advantage of significant long-term savings
Paying off your mortgage early could potentially result in significant long-term savings. Fewer years in debt will reduce the financial cost of the interest you pay on your mortgage.
For example, if you made a lump sum overpayment of only £5,000 on a £150,000 25-year mortgage (at 5%), you would repay your mortgage 18 months earlier and save £11,500 in interest.
2. The benefit of increased financial flexibility and freedom
Paying off your mortgage early will give you and your family increased financial flexibility and freedom. By no longer having to make mortgage payments each month, you have the freedom to redistribute this money to other areas. If your household has previously struggled to meet other household bills, this extra money will help to make your family life easier.
The extra monthly income will give you the financial freedom and security to reach your goals. Whether it’s buying a holiday home, starting your own business or building a nest egg for your retirement, you gain the financial freedom to make your own decisions for your future.
3. The cost of servicing more expensive debts
However, you need to weigh up your options, as it may not always be advantageous to pay off your mortgage early.
If you have other more expensive debts, it makes greater financial sense to clear those first. This is because the interest rate on credit card debt or unsecured loans is generally much higher than that on your mortgage, so they will cost you more money each month.
4. Review your pension options
Before you pay off your mortgage early, you also need to review your existing pension options and consider if they’re adequate for your needs.
As a tax-efficient form of savings, a pension scheme not only allows you to save money for your retirement but also attracts tax relief from the government, meaning you get to keep more of your hard-earned money.
If you don’t have a pension or your present pension provision could be improved, it may be more financially advantageous to use your extra income in this area first before making any overpayments on your mortgage.
5. Not realising a higher savings rate on your lump sum
Another instance where it may not make financial sense to pay off your mortgage first is when you can attract a higher interest rate on your money in a savings account.
In order to work out whether you can earn more money by saving your lump sum, compare the interest rate you will attract after you have paid tax, with the interest you will save by paying your mortgage off early.
6. Not being prepared for the unexpected
Life doesn’t always go to plan. If you aren’t prepared for the unexpected, you or your family could face enormous financial turmoil if tragedy strikes.
Before you make any overpayments on your mortgage, make sure you have an adequate life insurance policy in place and that you have between three to twelve months savings should financial disaster hit.
7. The cost and charge of overpayment
Finally, your mortgage provider may charge you a penalty for paying off your mortgage early, which can really eat into your potential savings. So check first to find out if there are annual or monthly overpayment limits enforced by your lender and what charges may be incurred, to enable you to make an informed decision.
But before you make a decision either way, it’s a good idea to seek professional financial advice. A responsible financial advisor will help you look again at the pros and cons of overpaying your mortgage, and will ensure you make the best decision for you and your family.
At Expert Wealth Management, we can help you do just that. Call our financial planning experts today on 01993 772 467 or contact us online.
