Paying off your mortgage can come with a sense of relief and accomplishment. So, if you want to clear the debt as quickly as possible, shortening the mortgage term could help you reach that goal sooner and save you money in the long run.
It’s common for first-time buyers to take out a mortgage with a term between 25 and 40 years. As a result, for most households, a mortgage will be an essential outgoing for decades.
Paying off your mortgage could offer you a greater sense of financial freedom later in life – it might enable you to retire sooner, spend more on the things you love, or build up savings at a quicker pace.
As well as enhancing your lifestyle, paying your mortgage off quicker often has a financial benefit. A shorter mortgage term means there’s less time for interest to accumulate, so the cost of borrowing is lower overall.
For example, assuming the interest rate remained at 4.5% throughout the mortgage term, if you borrowed £250,000 through a repayment mortgage with a term of:
- 20 years, you’d pay just under £130,000 in interest
- 30 years, you’d pay more than £205,000 in interest.
So, by shortening your mortgage by 10 years, you’d save around £75,000 in interest.
If you want to be mortgage-free sooner, here are five tips that could shorten your mortgage term.
1. Review the term each time your mortgage deal expires
The initial mortgage term you choose isn’t fixed. Taking the opportunity to review it when your mortgage deal expires is a good idea.
For example, as a first-time buyer, you may have opted for a 5-year fixed-rate mortgage deal with a 30-year term to help you manage your budget. At the end of those five years, you don’t have to choose a 25-year term. If your financial position has improved, you could shorten it and speed up the process of becoming mortgage-free.
Usually, as your equity in your home rises, the interest rate a lender offers you will fall as you pose less of a risk. As a result, you might be able to shorten the term when remortgaging without your regular outgoings changing too much.
2. Make bi-weekly mortgage repayments
Usually, you’d make monthly mortgage repayments. However, you can choose to make repayments at more frequent intervals. So, you might decide to split your monthly repayment in half and pay every two weeks instead.
This has two potential benefits if you want to reduce your mortgage debt.
First, you’d make 26 half-payments, or 13 full payments, over the year. So, there would be an extra payment each year that will go directly to reducing your outstanding loan.
Second, if the interest on your mortgage is calculated daily or weekly, bi-weekly repayments would reduce the outstanding balance more frequently, so there’s less debt to charge interest on. As a result, you’d pay less interest overall.
If your salary is paid monthly, you’ll need to keep an eye on your budget and outgoings with this option as some months would have three mortgage payments to cover.
3. Round up your mortgage repayments
A simple trick is to round up your monthly repayments – even a small, regular overpayment can make a difference.
Again, if you borrowed £250,000 through a repayment mortgage over a 30-year term with an interest rate of 4.5%, your usual monthly repayment would be £1,120 a month. If you rounded that up to £1,200 a month, you’d clear the debt two years and two months earlier, and save almost £8,500 in interest.
4. Maintain your repayments even if the interest rate falls
If you opt for a variable-rate mortgage, the interest rate you pay can rise or fall.
In the last 12 months, the Bank of England has cut the base interest rate several times. So, if your interest rate is variable, you’ve likely benefited from repayments falling recently.
You might celebrate the reduced outgoings, but if you continued to make the same repayment you did before interest rates fell it’d have the same effect as rounding up your repayments without affecting your day-to-day budget.
5. Pay off a lump sum overpayment each year
You don’t have to overpay regularly; you can choose to make a one-off lump sum overpayment too.
This could be a useful option if your income is variable, as you can make the overpayment when it suits you, or if you receive a lump sum, such as a work bonus.
Check if you could face an early repayment charge
Before you make mortgage overpayments, be sure to check your paperwork. Usually, you can overpay 10% of the outstanding value of your mortgage each year without facing an early repayment charge, but this varies between lenders.
Get in touch to talk to our team about your mortgage
If you’d like to talk to an expert about your mortgage and which deals could be right for you, please get in touch. We’re here to listen to your needs, answer your questions, and offer guidance throughout the mortgage application process.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
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