BEING mortgage-free is many homeowners’ dream, and property expert Ben Merritt explains how you can make it a reality in just 10 years.
Mr Merritt, director of mortgages at Yorkshire Building Society, has five tips for paying off your mortgage ahead of schedule – and they could save you thousands of pounds too.
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If you take out a loan to buy your house, you will agree to paying back a minimum amount to your lender each month.
But homeowners might not realise they can pay back MORE if they want to, and it could lead to being mortgage-free earlier than you’d planner.
If you overpay on your mortgage, it means that you pay more than this minimum amount.
You can do this by sending over extra cash regularly each month, or just as a one-off lump sum.
Why might you want to do this? It means you’ll pay back less interest – saving yourself cash in the long-run.
For example, if you have a 25-year £200,000 mortgage at 3%, over the period you will pay £84,478 in interest.
If you overpay by £50 a month, you’ll clear your mortgage a year and nine months earlier and pay £77,756 in interest – saving you £6,722.
But it’s important to remember there are hidden costs of doing so – and it might not be for everyone.
If you have debts with a higher interest rate, it might be worth paying those off first.
Crucially, the majority of lenders will only let you overpay by a certain amount each year – if you go over this, you’ll be hit with an early repayment charge.
Typically lenders allow you to overpay by up to 10% of the amount you owe on your mortgage each year.
But make sure you read the small print of your contract to check if you want to avoid hidden costs.
Here are Ben’s top tips for clearing your loan and being mortgage-free in just 10 years.
Every little helps
While a cost of living crunch wreaks havoc with household budgets up and down the country, many people will not have a lot of cash to spare at the moment.
But upping your mortgage repayments by £50 a month could save you thousands of pounds in interest, said Ben.
“Paying £50 a month more on a typical £200,000 mortgage could save you £4,000 in interest and mean you’ll be mortgage free 18 months earlier,” he said.
But mortgages are generally considered to not be a “priority debt” because the interest you pay on them is lower than a credit card or loan.
That means if you have other debts with higher interest, it may be better to channel any spare cash towards those instead.
Reduce your mortgage term
Your mortgage term is the amount of time it takes to pay off your loan.
A short-term mortgage is usually considered to be 20 years or less, while a term of 30-years-plus is classed as a longer term.
Reducing your term – making it shorter in length – means you’ll pay back your mortgage in a shorter period of time.
As a result, your monthly repayments are likely to be higher but you will pay less in interest over the term of your mortgage.
If you are considering reducing your mortgage term, make sure you’re not overstretching the household budget – you still need to be able to afford your other bills.
Get your house revalued
If you haven’t had your house revalued in a while, it might be an idea to get one booked in with an estate agent.
It’s likely that the value of your home has increased, especially as house prices have soared to record highs recently.
This could mean your the amount of equity you hold in your home has grown, which is in your favour as it may mean you can get a better mortgage deal.
“You may be able to unlock more cost-effective mortgage deals when it’s time to remortgage,” Ben says.
“Keep your monthly repayments the same as you’re used to paying, or more if budget allows, and you’ll be paying it off quicker without even realising.”
Check your deal
You might find you can nabs a better mortgage deal if you shop around.
This is particularly true if you’re currently on your provider’s standard variable rate, which is usually higher than a fixed rate mortgage.
The SVR is the rate you’ll be moved to once your fixed rate or tracker mortgage ends.
Crucially, providers can change their SVR whenever they like, which means if the Bank of England hikes interest rates, your monthly repayments are likely to go up too.
If you lock in to a fixed rate mortgage, you’re protected from interest rate hikes for a set period.
“Seek advice if you’re unsure what’s the best deal for you; and remember we’re in a rising rate environment,” Ben said.
Speak to your lender
If you’re seriously considering overpaying on your mortgage, it’s best to talk to your lender first.
It will be able to help you figure out the most efficient way of doing this – and can flag any early repayment charges or other fees.
Ben said: “You could also speak to a mortgage broker or financial adviser too.”
These should be able to give you impartial advice, and could potentially direct you to a better mortgage deal.
Ben added: “Ultimately, it’s important you’re aware of all the facts before making any decisions.”
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