August 30, 2013

Paying Off Mortgages Early

There are few words more painful to so many people than the word “mortgage”. The monkey on our backs that can take a large proportion of our lives to eventually get rid of - if we ever even manage that - mortgages are often a deliverer of stress and bad news. There are two approaches to dealing with mortgage repayments. The first is to maximize the short-term stress of it all at the expense of major long-term stress, by paying it off early. The other is to minimise the short-term stress of your mortgage, by increasing and maximizing the long-term stress, through paying it bit by bit as it comes along. The most responsible solution is clear.

If you have money to spare at the end of the month, you might be wondering what to do with it. One of the best things you can do with any spare cash is to consider paying off your mortgage early. By overpaying your mortgage, you could make big savings on your interest and cut years off your mortgage term.
So how much can you save?

Let’s look at an example:

Let’s assume you have a repayment mortgage of 150,000GBP that you’re paying back over 25 years, and you’re paying 5% interest. Your current monthly mortgage payments would be just under 877GBP per month. If you could pay an extra 150GBP per month, that would cut your mortgage term from 25 years, to 18 years and ten months. You would have therefore reduced your mortgage term by six years and two months. That’s almost a third of your mortgage term.

Best of all, you’d have saved over 31,000GBP in interest payments.

Overpaying Isn’t Always Wise

It’s worth pointing out that there are times when you shouldn’t overpay your mortgage – such as if you owe money on a credit or store card, or if you have a personal loan. That’s because you’ll pay a higher rate of interest on these other types of debt than on your mortgage. If you have cash to spare you should pay off these debts first.

You should also have some rainy day money for unexpected expenses. Try and save enough to live on for three months if you can.

You also shouldn’t overpay your mortgage if you have a big purchase to make in the next few months, as you may not be able to borrow back the money you’ve overpaid.
Before you make a payment, ask your lender when it’s best to overpay. With most mortgage deals it shouldn’t make a difference, but with some older mortgages, you might be better off making one payment at the end of the year.

Some mortgage deals have a limit on the amount you can overpay. Make sure you don’t pay off more or you could have to pay a charge. Check with your bank how much extra you can pay off, and find out if your lender has a minimum amount for overpayment.

Capitalise on Circumstances

There are plenty of other circumstances by which you may wish to overpay your mortgage, such as in the advent of yearly work bonuses, tax refunds (which can be calculated by, or the generation of business income revenues.

Your ultimate aim should be financial independence and mortgages are one of the greatest stumbling blocks towards this being achieved. The idea should be to eradicate all types of debt within your life as early as financially possible, in order to ensure you grow old without the stress of having to deal with debts or mortgages.

Patience is probably the last rule to paying back mortgages, as you must remember that mortgage repayment is a long-term game that can span over multiple decades before your end goal is achieved.

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