Starting a new year and thinking about the future – and paying off the mortgage early

Looking forward to a prosperous new year – needs to be more than just a matter of wishful thinking. It needs careful planning.

At Continuum we know the importance of good financial planning, and we have found that one way that many people can improve their financial situation is by paying off their mortgage early.

The average mortgage term is 25 years, and terms of 35 years or more are becoming more common as house prices grow. During that time, you will pay hundreds of thousands of pounds in interest.

Paying off early helps you in two key ways. It will mean that buying your home will cost you less overall and that you will have more money in your pocket thanks to being mortgage free sooner.

The effect is dramatic. With a 25 year mortgage of £150,000 at 5% interest, paying off a £5,000 lump sum at the start will cut the overall interest you pay by £11,500 – more than double the extra you pay in.

It also allows you to become mortgage free 18 months earlier.

But before you start trying to force cash onto your lender, you will want some help from a Continuum mortgage expert adviser to see if you could pay off early – and whether it really makes sense for you to do so.

Can you afford to overpay?

Paying out more each month might bring savings in a few years’ time – but it might mean financial hardship now. Your Continuum adviser can help you work out what cash you have available, and whether overpaying is practical. If it is not, don’t be downhearted – there could still be a way to save.

Should you overpay?

With interest rates so low, some financial experts argue that there’s very little point in paying off your mortgage early, especially if you have other debts to deal with.

So, if you talk to a Continuum adviser about repaying early, the first thing they might look at is your other debts with higher interest rates – and whether you should pay them off first. They can help you make sure you are ready to start overpaying, and work out how much cash you can spare to do so.

Can you overpay?

If you decide that you do want to think about overpaying, the next step is to get your Continuum advisor to help you find the most cost-effective way to do so. It is not as simple as putting in a little extra each month when you have some spare cash. You need a strategy to ensure that your extra payments work as hard as possible.

If your mortgage interest is charged daily, then the sooner you make the overpayment the more you save. If it’s charged annually, you need to time your overpayment to count towards the calculation of the interest for the year.

Will your lender let you overpay?

With some lenders, you may even face a penalty charge for overpaying your mortgage. He or she will look at the small print to see if overpaying will mean penalties. Most now let you overpay up to 10% a year, while flexible mortgages let you overpay your mortgage and even draw back the money if you need it without charge.

You might need to remortgage to have the facility to overpay, and your Continuum Advisor will be pleased to help here too.  He or she will help you find the best deal for your immediate needs, which will probably be a low introductory rate fixed for 2 to 5 years. You can make the most of this by repaying as much as you want.

At the end of the fixed rate period, you’ll end up on your lender’s standard variable rate or SVR – but your advisor will help you to remortgage again.

Remortgaging to cheaper deals throughout your mortgage term means substantial savings, even if you don’t overpay. So, whatever your plans, a call to the Continuum team could mean cutting the cost of owning your home.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

Your home may be repossessed if you do not keep up repayments on your mortgage.