Published: 07/12/2018

At a glance

  • Always take stock of any debts you may have before you start thinking about reducing your mortgage term, as you will likely lose more in interest charged than you’d be able to save.
  • The main options for reducing your mortgage term are increasing your repayments, making overpayments and/or getting an offset mortgage.
  • Consider the savings rates available on the market, too, to see if you’d be able to earn more in interest than you’d save by overpaying/offsetting.

Paying off your mortgage early is a sensible thing to consider. Luckily, even a small change can make a big difference to your overall mortgage balance.

Just £50 extra per month could shave a significant amount off the term of your mortgage, so that, depending on the size of your mortgage and how much you overpay, you could finish months or even years earlier!

Repay expensive debts before your mortgage

Before you start overpaying your mortgage, think about any other debts you have. Expensive credit card, overdraft, store card and catalogue debt is better repaid first, because the interest rates on these will normally be higher.

If you're only repaying the minimum amount on a large credit card balance, you'd be surprised how long it can take to pay off – we can be talking decades! So, repay expensive debt before looking to pay off your mortgage, either by paying more than the minimum or by changing credit cards.

Transferring costly balances onto a new 0% balance transfer credit card could be a great place to start, as it can help you make significant in-roads into your debt.

Make your savings work harder

If the mortgage rate you're paying is more than the interest rate you're earning on your savings, as in the table below, you will save more by repaying your mortgage than you'd receive in savings interest. If you pay tax on your savings interest, the benefits of paying off your mortgage first are even greater.

Savings Balance

Savings interest (gross) earned at 2.20% in one year

Mortgage interest paid at 4.00% in one year

£2,500

£55

£100

£5,000

£110

£200

£10,000

£220

£400

£15,000

£330

£600

£20,000

£440

£800

All calculations assume that interest is calculated and applied annually. Mortgage interest figures are maximums based on what you could pay on an interest-only mortgage.

Shortening your mortgage term

The shorter the term of your mortgage, the less interest you pay overall. Your existing mortgage lender may allow you to reduce your term, or you could remortgage to a new deal.

The flipside of a shorter term will be higher monthly repayments. Be careful not to cripple yourself with your mortgage payments by only setting them at a level you can comfortably afford.

If you don't want to commit to a higher payment, and would like some flexibility in how you repay, maybe overpaying or offsetting is a better option. However, if you're not very disciplined, a shorter term is the safest and surest way to repay your mortgage early.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

If you're coming to the end of a fixed rate that'll go onto a cheaper variable rate, or even if you're considering remortgaging to a cheaper deal, consider maintaining your payments at the same level. By doing this you won't notice any difference, but you'll be taking a big step towards shrinking that mortgage balance.

Making overpayments on your mortgage

Many mortgages will allow you to make overpayments. An overpayment is an amount you can pay in addition to the contractual monthly payment on your mortgage. You can usually do this on the same direct debit as your mortgage, or by paying off a lump sum.

If you’re considering overpaying to reduce your mortgage term, here are a few things to keep in mind:

Find the lowest rate

To keep standard repayments as low as possible, it makes sense to find the lowest rate to suit your circumstances. That way you could potentially afford to overpay a significant amount each month, and could ideally drop to a lower loan-to-value (LTV) band when it's time to remortgage, which could in turn lead to even better rates.

Have you fixed?

Opting for a fixed rate deal could well be the best option, particularly as rates will probably creep up over the next few years. Those with a deposit of 20%, 10% or just 5% will be able to find five-year fixed rate mortgages, but even fixing for two or three years could be worthwhile. The number of 10-year mortgages available is also on the rise, so you could have the peace of mind that your rate won't change for an entire decade.

Check the overpayment terms

Most fixed mortgages offer some flexibility when it comes to overpayments, typically allowing homeowners to overpay by up to 10% of the total balance of the mortgage per year. You may have to pay a penalty if you go over this, and if you pay off your mortgage completely you will likely be hit with an Early Repayment Charge, so always make sure to thoroughly check the terms and conditions. Those on a variable rate, meanwhile, might find there are no overpayment restrictions whatsoever, but it's always worth checking.

Savings vs. mortgage overpayments

As discussed, you could well find you'll save more by repaying your mortgage (and therefore reducing the amount of interest you'll have to pay) than you'd earn from interest on your savings. Overpaying is one way to make your savings work harder. However, it is always a good idea to have a savings pot of around 3 to 6 months’ regular expenditure to call on in an emergency.

Offsetting your mortgage

Another option is an offset mortgage. This works by having a savings account linked to your mortgage. Monies held in the savings account are taken off – or offset against – the mortgage balance, so you're only charged interest on the mortgage balance minus your savings balance. This, in turn, saves you mortgage interest.

Usually you can choose whether to have this saving reflected in lower mortgage payments or a shorter term. If you wanted, you could also overpay and save even more money.

To find offset mortgages, go to your relevant mortgage search page and select the relevant option under ‘Other refinements’. More information about offset mortgages can be found in our guide on the subject.

Should you overpay or offset?

 

Offsetting

Overpaying

Do I earn interest on my savings?

Not usually. Your money saves you mortgage interest instead.

No. Your money repays a portion of your mortgage balance – you save mortgage interest instead.

Are there any limits on how much I can put in without incurring an Early Repayment Charge?

Because you aren't physically repaying your mortgage, you don't have to pay any Early Repayment Charges.

There may be if you're in an initial rate period. If you can overpay, it's generally only up to 10% of the outstanding mortgage. You can overpay more, but you would face an Early Repayment Charge. After the initial rate period ends, there aren't usually any restrictions on how much you can overpay. If you are unsure, ask your lender before overpaying, or check section 11 of your Mortgage Offer for more details.

Can I withdraw my money easily?

Your savings remain separate to your mortgage and can be withdrawn depending on the terms of the account.

You may not be allowed to take your money out of your mortgage. Where you are allowed to ‘borrow back’ this money it will be at the lender's discretion and might be subject to certain minimum withdrawal limits. If you are unsure, ask your lender or check section 12 of your Mortgage Offer for more details.

What compensation would I get if my mortgage lender goes bust?

The first £85,000 of your offset savings are covered by the Financial Services Compensation Scheme. Amounts above this aren't lost - instead they are used to pay off part of your mortgage balance.

Your overpayments will have reduced your mortgage balance, so although you wouldn't get any compensation, you would have less of a mortgage.

Do I need to remortgage?

If your current mortgage doesn't have an offset facility, you will need to remortgage to take advantage of offsetting your savings.

Not necessarily. Your current mortgage may allow overpayments – ask your lender or see section 11 of your Mortgage Offer for more information. If you have finished your initial rate period and have no Early Repayment Charges, you should be able to overpay – contact your lender for more details.

Do I pay tax on the interest I save on my mortgage?

You're not liable for any tax on interest you save on your mortgage. Only if you earn interest on your offset savings – which is unlikely – will you have to pay tax, and then solely on any interest earned over your Personal Savings Allowance.

No.

What are mortgage redemption fees?

When you reach your goal of paying off your mortgage you may need to pay your lender a mortgage redemption fee

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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At a glance

  • Always take stock of any debts you may have before you start thinking about reducing your mortgage term, as you will likely lose more in interest charged than you’d be able to save.
  • The main options for reducing your mortgage term are increasing your repayments, making overpayments and/or getting an offset mortgage.
  • Consider the savings rates available on the market, too, to see if you’d be able to earn more in interest than you’d save by overpaying/offsetting.

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