Now, this is a topic where a lot of financial people would say that we’re doing it wrong, but this is our take on mortgage overpayments and financial freedom.
We’re overpaying our mortgage and aiming to pay it off early. Sort of. We first got our mortgage in December 2012 and, for the majority of 2013, we made overpayments of around £700 each month. This was in addition to our regular payment which goes out at the start of the month. However, this was unsustainable for our aims.
When we re-evaluated our aims towards the end of 2013 we changed our mind on the goals we would set for 2014 (see more on there here) and what we were hoping to achieve in the long run. We decided that we’d need to change the amount we were overpaying as we had different, bigger savings goals that we want to achieve. Also, we’ve looked at more long term, including retirement planning (more on that another day!) and there’s only so many ways our money will stretch. However, both me and my husband agree that paying off more than just our mortgage payment takes off every month is a good thing. Our mortgage rate depends on the Bank of England interest rate. At the moment, it’s good because interest rates are so low, but as soon as they go back up, even a bit, the interest on our mortgage will also go up.
So, our new plan regarding overpayments is to overpay at least the mortgage interest every month. This is about £300 each month at the moment. By overpaying by this amount plus a little extra, we’re still on track to pay off our mortgage a lot earlier than it would do on paper, but we’re managing to achieve other financial goals at the same time. In relation to our financial freedom goal eventually, being mortgage free is a massive part of that. The amount of pressure every month will be greatly reduced, as we’ll have less bills that we need to pay each month. To ensure financial freedom and for it be a success, we need to make sure that our outgoings are at a suitable level in relation to income. We can’t do that with a big mortgage payment! Having said that, we also want to create other income streams, so overpaying our mortgage can’t be the only priority.
So there we go; we’re sort of paying off our mortgage early. And we’re okay with that.
Do you agree? Or not? Are you paying your mortgage off early? I’d love to hear your thoughts in the comments below!
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I think paying any extra is a good idea!
Us too! Thanks for stopping by 🙂
Ultimately, paying off a mortgage early is a deeply personal decision. I’m not making that choice for myself because I’d rather use the cash for other investments. At a 3.25% fixed rate of interest, paying off the remaining 12.5 years of my mortgage is less of a priority than buying stocks and generating passive streams of income.
I agree that it’s a personal decision – for us, the much smaller outgoings once the mortgage is gone is much more appealing at the moment. But, I can totally understand where you’re coming from 🙂
Hi,
It’s my first time on your blog. I love the template. It looks great.
I’ve been working in finance since 2005 and one thing I understood is that many professional advisors with whom I had the chance to work with just don’t know what they are talking about… And I realized that they were not alone… They are just salespeople trained by banks or other financial institution to sell products they don’t even fully understand. Of course, some of them are probably great… But good luck finding one! By definition they are always in conflict of interest. They either have to earn commissions or they have to meet objectives set by their employer…
Just trust yourself, keep learning about finance and do what you think is best for you and what makes sense.
I agree that paying off the mortgage must be part of the whole plan, not the only thing one should do since a single family house usually is a poor investment. I also know it is temping to invest money somewhere else when interest’s rate are low on the mortgage, but they won’t stay low forever… Being debt free is already being rich! And mortgage payments can fluctuate a lot with interest rates and put a lot of pressure on a tight family budget. I do prefer having the lowest mortgage balance possible in case rates skyrocket! It could happen… No one can know for sure.
So, while interest rates are very low I think it is a good idea to make extra payments to lower the balance at the maximum possible. After all, even a small 2% increase on a 300,000$ mortgage balance can represent a 350$ per month increase in mortgage payments (300k on 25 years, 5% fix vs 3% fix)…
When thinking about rates you also need to take into account the mortgage balance. To replace a 350$ monthly increase on your mortgage payment by passive income you would need to have 100,000$ invested at 4%… Or 50k at 8% approximately… I think that lowering the mortgage balance is always a good idea. You can’t control future interest rates. But you can control your mortgage balance. Working on what we have control is often the best thing to do. It will give you more flexibility when rates are gonna go up!
I actually do the same and I hope to pay off my mortgage within 7 years. I make extra payments every two weeks and my fiance might double my payments pretty soon so we can get rid of that debt. It will be such a pleasure to be free from these huge payments every months.
One of my manager also paid off two mortgages in 8 years each, one for the condo and one for the chalet. Trust me, she’s one of the wealthiest person I know. When you are mortgage free you are almost financially free.
At the same time, I also save a lot and invest in dividend growth stocks in order to be able to retire early.
The important thing is to have a plan, stick to it and don’t put all your eggs in the same basket (i.e. don’t just pay off mortgage, make sure you also save for retirement and clear personal debts with high interest rates).
Keep going!
Wow, thanks for taking the time to type that huge comment out 🙂 I do agree that being mortgage free will mean a lot more freedom, and it has to be part of our plan – which it is 🙂 good luck with your 7 year target; imagine the day when you send in your last mortgage payment! You’ll feel great 🙂
We overpay our mortgage too, though not as aggressively as we used to. I just don’t want to take the full 15 years to pay it off. Too long!
That’s exactly our thought process too – though our mortgage is supposed to last for 25 years! Far too long!
I agree with you about ‘paying early (sort of)’.
I just started a new fixed rate mortgage last year and while I’m only directly overpaying a small moment each month, I’m putting the majority of the overpayment I’ve budgeted into relatively low risk investments so that I can pay a larger amount down in the future.
My reasoning here is that I’m getting some value out of the income tax deduction from the mortgage while principal is a small portion of my payment and in the meantime inflation / salary increases reduces the cost of my mortgage payment each year. As you and other comments have noted though, it all depends on individual circumstance.
One option that is not commonly discussed aside from paying early or re-financing a mortgage, is re-casting or re-amortizing the loan where the bank will recalculate your monthly payment based on what you’ve paid down; this lowers the monthly payment but spreads the payments back over the original life of the loan. I decided against doing this when I had some extra money but it’s another tool in the financial toolbox that may come in useful someday.
Great job on your blog; I’m enjoying reading it and wish you all the best on your journey. Your byline reminds me of the TV show The Good Life that I used to watch growing up in the UK!
The only people I have ever heard argue against mortgage prepayment are Americans. And that’s different because they have crazy low rates and – more importantly – 30-year fixed rates, unlike us. We don’t have that certainty.
Thanks for your input – lots of people argue that it isn’t a good idea but if interest rates go up even 1% in the UK, it’ll add lots to our monthly payment, so for us, overpaying whilst interest rates are low is a positive thing 🙂
We overpaid ours as we wanted to clear it before our 2 daughters went to University. We had both of them at uni together for 2 years as only one school year between them. Paying off the mortgage by the time they went meant that money was available to help subsidise student loans by way of parental contribution. After they left the spare money was invested to go towards early retirement plans.