Paying off their mortgage is a goal for many homeowners, and research shows that more households now own their property outright. If you’re still making mortgage repayments, read on to find out how you could pay off your mortgage quicker.
According to a report in IFA Magazine, the number of households who own their property outright has gradually been increasing over the last three decades.
In 1992, just over a quarter of households owned their property outright, and around 43% were paying off a mortgage. By 2021/22, more than a third owned their property outright, while almost 30% were making mortgage repayments.
It’s not surprising that older generations are the most likely to own their home outright – just 5% of homeowners aged 65 or over still have a mortgage.
Paying off your mortgage could significantly reduce your outgoings and give you more financial freedom. Once you’ve reached the milestone, you might plan to retire or use your increased disposable income to indulge in your hobbies.
If you have a repayment mortgage and keep up with repayments, you’ll eventually own your home outright. But if you want to reach the goal quicker, here are three practical steps you could take.
1. Overpay your mortgage
Overpaying your mortgage is a simple way to pay down the debt quicker. As well as helping you become mortgage-free sooner, it could also reduce how much you pay in interest.
For example, if you used a 20-year repayment mortgage to borrow £200,000 with an interest rate of 4.5%, your monthly repayments would be around £1,260 a month. By making regular overpayments of £200 a month, you could be mortgage-free four years sooner.
As interest is calculated based on the outstanding balance, you’d also save almost £23,000 in interest in the above scenario.
Alternatively, you could pay a lump sum off your mortgage.
Again, let’s say you’ve borrowed £200,000 over 20 years through a repayment mortgage with a 4.5% interest rate. If you choose to make a one-off overpayment of £20,000, you could pay off your mortgage three years earlier. In addition, you could save more than £25,000 in interest.
You should check the terms of your mortgage before you make repayments as some may charge you an early repayment fee. Often, you can repay up to 10% of the outstanding balance each year without incurring a fee.
2. Shorten your mortgage term
When your mortgage deal ends, it could be worthwhile to review the period you’ll pay your mortgage over, known as the “mortgage term”.
Traditionally, first-time buyers take out a mortgage with a term of 25 years. However, as house prices have increased, many are choosing longer terms.
You might increase your mortgage term for various reasons too. Perhaps you increased it to manage your outgoings when you moved to a more expensive home or borrowed more through your mortgage to complete a home improvement project?
Shortening the mortgage term would increase your monthly outgoings, but would mean you pay off the debt sooner.
Borrowing £150,000 through a repayment mortgage with a 25-year term at an interest rate of 4.5% would result in repayments of around £833. If you shortened the mortgage term to 20 years, your repayments would rise to £949.
It’s worth noting that as you gain more equity within your property, the interest rate you pay on your mortgage might fall. So, shortening the mortgage term might not lead to repayments increasing by as much as you expect.
3. Consider an offset mortgage
For some people, an offset mortgage could help reduce their mortgage repayments and pay off the debt quicker.
An offset mortgage links a savings account to your mortgage. The money held in the savings account usually won’t earn interest. Instead, your mortgage lender will use the money in your savings account to “offset” the amount you need to pay. So, the more you have in the savings account, the more your repayments could fall.
This could be a useful option if you want to make overpayments but retain some flexibility in case of emergencies. It could also be valuable if you have cash that’s set aside for a particular purpose. For example, if you’re self-employed, you might have a large amount of money that you’ll use to pay tax bills or in case of emergency if your income is volatile.
As your repayments could fall when using an offset mortgage, you might have more opportunities to make overpayments or use the money in the linked savings account to clear the debt when you have enough.
There are drawbacks to weigh up before deciding if an offset mortgage is right for you. For instance, your savings wouldn’t be earning any interest.
Contact us to talk about your mortgage needs
If you’re searching for a new mortgage and want to pay off the debt quicker, we could help you find the right deal for you. Whether you want the freedom to make overpayments without facing a charge or have questions about how an offset mortgage could work for you, please get in touch.
Please note:
This blog is for general information only and does not constitute advice. 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.
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 14/03/2024
