How to pay off your mortgage early

Paying off your mortgage early is one of the best investments you can make.

You get rid of your biggest debt fast, you are no longer at the mercy of the see-saw property market and you can put the money you are no longer paying on the mortgage to good work.

Borrowing heavily makes sense in a world of high inflation, which we saw in the Seventies and Eighties, because inflation reduces the value of the debt.

But in a world of low inflation the debt stays pretty much as it is.



Inflation may have risen in recent years but it is currently relatively low historically speaking, especially using the Government's preferred Consumer Prices Index measure. Crucially, however, just having inflation is not the key to eroding your debt, you also need wage inflation. This has been virtually non-existent since the recession hit and if you can't rely on large wage increases reducing your debt then paying it off asap is a wise move.

>> Check the current inflation rate





Why you should overpay

Say you have a £100,000 mortgage taken out over a 25-year period, with an interest rate of 6%. Overpaying by £100 a month could save you a healthy £26,892.54 and knock six years and four months off the life of your mortgage.

Interest rates are low at the moment. And that means many people on tracker or SVRs are paying low mortgage rates.



On the surface, the impact of the saving from overpaying is greatly reduced by comparison to when rates are high - but if you use the money that you are now saving by having a lower mortgage rate to add to overpayments you'll get the debt cleared even faster.

For example: our borrower above at 6% has monthly repayments of £644, if their mortgage rate falls to 3% their new monthly repayments are £474.

If they overpaid by £100 they would save £10,730.94 and knock 5 years and 11 months off their mortgage, but add the £170 they are getting from lower monthly payments and overpay £270 a month and they save £20,178.89, but most importantly clear their mortgage 11 years and 4 months early.



What to watch out for



Beware with some lenders there is a minimum amount you are allowed to overpay. If you pay in less than this, your money sits in the lender's coffers until the end of its financial year, which means you are giving it an interest-free loan.

If you pay more than the minimum, your interest bills will be recalculated from the following month.

>> Advice from This is Money readers on whether to repay early

Some firms offer flexible or 'offset' mortgages that recalculate your balance daily. The effect is to help you get rid of your loan even faster and people can take advantage of this by paying extra every month.

Many High Street lenders have given normal loans flexible features, although some set minimum or maximum amounts you can overpay.

Watch out for charges

If you are on a fixed or tracker rate deal, you may have to pay an early redemption penalty if you pay off your mortgage completely, or go beyond permitted overpayments. On some poor value mortgages. this can stretch for several years after the initial rate is over. Making repayments in this situation is unwise.

Neither should you repay some of your mortgage if you have heavy credit card debts on regular (and high) APRs - mortgage loans are still the cheapest around.



It doesn't make sense to repay a mortgage at 6% if you have credit card debts where you could be paying 15%-20%.

And finally...

If you really want to achieve a mortgage-free life, you need to be disciplined. To put down lump sums on your mortgage, you will obviously need to some how free up money elsewhere and be a money master.

Fortunately, This is Money has everything you need to help you make more money and spend less...

1. Read our quick round-up of how to spend less and make more



2. Read our guide to getting a pay rise

