This is one of our big aims so I thought I would share how to pay off your mortgage early. One of the biggest monthly expenses for most houses is a mortgage payment. Imagine if that was gone; how much more room in your budget you would have for other things?! There are certain steps to help to pay off your mortgage early so I thought I would share them. These are all the things we are doing to get rid of our mortgage so that we can retire early!
The three parts to a mortgage
When thinking about overpaying your mortgage, there are three things that will come into it. The principle of your mortgage, the interest added to your mortgage and time All of these things combined make such a big difference when trying to pay off your mortgage early.
The principle of your mortgage is the amount you have borrowed. For this post, I am going to use the example of £150,000 borrowed from the bank. This is the mortgage loan which might have an interested of 2.79% applied. The principle is the bit that is the biggest factor in paying off your mortgage early. The more you borrow, the longer it might take! But not always; just a bit of wiggle room will help.
The interest added to your mortgage also counts in the calculations to pay off your mortgage early. When you first get your mortgage, so your principle amount is the highest it is going to be, so is the interest. In the sense that the interest is applied to the loan. So if it’s 2.79% interest added on to your mortgage, that is calculated daily. So, when you are thinking about how to pay off your mortgage early, the interest added has to be factored in. When you first start, this will be a lot higher! In fact, your first year or so of mortgage payments are going towards mainly paying off the interest added.
The third part of the mortgage journey is time. A lot of mortgages are either 25 of 30 years. This gives the bank a lot of time to make money back on that principle loan! Once that interest is added over 25 years, they have made the original amount back plus a lot more. Banks are businesses, so they have to make their money somehow.
So, where to start?
The first thing to check when thinking about how to pay off your mortgage early is whether or not your mortgage has penalties for overpayment. Most mortgages now have a 10% rule; you can overpay by 10% each year of the loan amount. So, in the first year you can pay back 10% of £150,000 which means your overpayment for year one could be £15,000. That would make a great difference in getting that interest added down!
When you first signed all of those documents for your mortgage, somewhere in there it says about overpayments and penalties. Check this – if you go over the amount you’re allowed then there are big charges – thousands – that you will face. No one wants that!
The more you can do to begin with, the better. So, you have saved long and hard for your house deposit and finally made it – great! Now, don’t take the foot off the pedal. Use that same momentum and those same numbers to make big overpayments to your mortgage in that first year – checking about how much you’re allowed – because this is when it will make the most difference. If you can overpay as much as you can for the first three years of your mortgage, then you will save the most money in the long run.
Finally, every single penny counts. I made a video over on YouTube which demonstrates the savings made if you overpay by just £50 a month – the numbers are insane! Change that to £100 or even £500 and it’s staggering, the amount of money you will save in the long run. Have a watch and see just what impact you can have. Have a look at your budget and see where you can find just that bit extra to start to pay off your mortgage early; it will be worth it in the end.
If you use the MoneySavingExpert mortgage overpayment calculator, it can help you decide what to aim for each month. Have a look!
Do you do any overpayments? Are you planning to? I’d love to hear from you in the comments!
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Is it better to pay extra off the mortgage when interest rates are so low (and could go lower as we hit negative base rates), or funnel extra funds into investments given the long term average returns and recent market drops?
This is a great post! Thank you so much for sharing 🙂 We took out a 25 year mortgage last year but we’re aiming to be mortgage free in 15 years – or less (hopefully!) by making regular overpayments. Like you say, making big overpayments in the first few years will make the most difference – so, some of the big renovation plans we have for the house will have to wait a while! I am learning that patience is one of the best virtues in this financial independence game 🙂