Paying Off Your Mortgage Early
The wage-earner’s millstone
Twenty five years is the average period of a mortgage… Twenty five years is a long time! The dream of many people is to pay off their mortgage early. Can it be done?
What’s the benefit?
Some people feel that they are only working to pay the mortgage, it’s more of a psychological thing than a truly financially driven situation, however, it can get to feel quite depressing. Then there are those who are very clear that they can see how much they are paying in interest over the length of the loan and can see the financial sense in paying off the debt as soon as possible.
These days there are no longer the tax incentives there used to be for having a mortgage and in an economic climate where inflation is low that debt is gong to remain pretty much in place as it is for some years. In the nineteen seventies inflation was running at such as high rate that large debt soon dwindled into insignificance due to rapid and high pay increases. But this is not the case today.
Where to start?
First of all you need to make sure that you have a mortgage that will allow you to make additional payments each month over and above those you agreed as part of the mortgage conditions.
Some mortgages will only allow you to make additional repayments of up to 10% of the mortgage value each year, but if you have a flexible mortgage that will allow more, then the figures can really start to add up.
- Different Types Of Mortgage
Rather like a full house in poker there seems to be a wide selection of mortgages on the market, but aren’t many of them the same kind of product?
For example, if you had £100,000 mortgage that was due to run for a period of twenty five years and you put in an additional £100 a month from the start then you would save in excess of £27,000 and end up finishing your mortgage six years early.
Think before you jump
Make sure you are aware of any penalties that may exist if you make these additional payments. Some mortgages particularly those that offer special rates such as capped periods, or periods of fixed interest or simply reduced standard interest rates, will have penalty clauses in place. Sometimes these can also apply for some time after the special offer period ends.
Blinkers could cost you money
The other thing to watch out for is being too blinkered and focussing just on the need to pay off your mortgage and not looking at your overall finances all together. There would be little point in trying to pay off your mortgage early if you have large debts outstanding on your credit cards. Credit cards are going to be costing you far more in interest than a mortgage ever would as mortgages usually offer the lowest rate of interest for borrowing money.
- Why Does The Interest Rate Of Your Mortgage Change?
The biggest difference between a mortgage and other types of loan is the fact that the interest rate changes throughout the term of the loan. Why is this? And which type of interest-rate arrangement is best?
Bright Young things
Latest figures show that home buyers in the UK are actually paying off their debts on their property quicker now than at any time in the last since eight years. The average age for somebody to now own their house outright without a mortgage is 48. The figures show the average mortgage is now repaid in 21 years.
Flexible mortgages which enable the necessary over payments without penalties are proving increasingly popular and fro good reason. These mortgages calculate interest on a daily basis which means as soon as you put in a few extra quid you are instantly lowering the amount of interest you pay and saving money.
Before you decide to repay your mortgage debt early you really should go back to look at the bigger picture of your overall finances. It is recommended that you have a minimum of the equivalent of three months income put aside as savings. This is money for the ‘rainy day’: those unexpected emergencies, such as an unanticipated illness, or any of those many things out there waiting to trip us up.
Figures show that if we are saving at all, then we are only putting aside 12 pence for every one pound earned. A comparison between the interest rates earned on savings and interest rates charged on debt shows there isn’t much incentive to save. Ridding ourselves of debt appears to still be our priority, and with current interest rates it’s easy to see why.
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