Category: Mortgages


Is it Worth Paying a Mortgage Back Early?

There are many people these days that are striving to pay their mortgages back early. You may hear of this and wonder whether it is worth you doing the same thing.
The main reason for people paying their mortgages back early is due to the cost. The longer you borrow money for, the more expensive the costs of borrowing are. This means that if you pay it back a year early, you save a year’s interest and if you manage to do it even earlier then you will save even more. However, not all mortgages are the same and some do not offer the same benefits as others.

Repaying a mortgage early is something which is quite a recent phenomenon. This means that not all lenders are geared up for people repaying early and some have high charges to allow them to do this. Most lenders would charge a small administration fee to set up an overpayment accounts so that you can make repayments on the mortgage that are higher than required. Some will charge a significant fee for doing this, called an early redemption fee. It is worth finding out whether your lender charges and how much the charge would be so that you can calculate whether it really is worth overpaying.

While overpaying and saving interest sounds like the best idea, it is worth considering whether there would be ways that you could do better with the money that you are overpaying. If you invested it, for example, you could get a better return compared with the money that you would save on the mortgage interest. Obviously this is a risk as no return on investments is guaranteed and you may in fact lose the money that you have invested rather than gain money. There are different levels of risk with different investments and so it is worth looking into this and see whether you are prepared to take any risk and if so, how much. A financial advisor can be a big help with a decision like this.

You may think that you will be better off putting the money in a savings account. Although they are low risk and you will not lose the money that you have saved, interest on these tends to be very low. This means that you may not make as much interest on the savings than you are paying on the mortgage. This is very rare in fact as banks tend to charge more to people borrowing money than they pay out to savers as the difference is their profit. If base rates are very low and the mortgage rates reflect that and you can find a savings account that pays really good interest, you may be able to beat it but it is very rare. Savings is a difficult issue for some people though as they would rather the security of having some money in a savings account in case they need it, rather than being used to pay off debt. It makes financial sense to use it to pay back the debt, but having savings can offer some peace of mind. This is why having a mortgage where you can overpay but also draw out money can be a big advantage and then you can treat the overpayment account as a savings account. You can have the peace of mind of knowing there is money there to fall back on but you will also be offsetting the mortgage debt and saving interest at the same time.

As well as having financial benefits paying back the mortgage early can help you to feel a lot better too. Knowing that the burden of a debt is gone can bring a sense of relief as well as joy. Knowing that you own your own home and it no longer belongs to the bank can also be such a fantastic feeling and could release you from some restrictions placed on you by the mortgage company. Without a big mortgage debt and repayments to make you could find that it will be easier for you to borrow money for other things, should you want to. The money that was being used to make mortgage payments could also be put into a savings account or paid towards retirement; there are many exciting possibilities.