There’s nothing wrong with wanting to pay off your mortgage early. After all, owning your home outright can give you peace of mind and significantly improve your net worth.
However, paying off your mortgage early isn’t always the best idea. Like many other financial decisions, it depends on your current situation and what your money goals are.
So before you start working on being mortgage-free, here are some things to consider.
Pros of early repayment
The most obvious benefit of paying off your mortgage early is that you’ll free up a significant amount of money every month. This could leave you with more cash to invest or do other things with, such as spending on home renovations, going back to school or pursuing a hobby.
There are a number of other pros to consider.
Your home is truly yours
When you pay off your mortgage early, you have the peace of mind that whatever happens in life, you’ll have a roof over your head.
You have equity in your home
This means you can borrow against the value of your property should you ever need a large amount of cash urgently.
You’ll save a lot of money in interest
Let’s say you have a mortgage of £150,000 on a standard 30-year term at 4.5% interest. This means you’re paying £760 a month towards the mortgage. Now, imagine you decide to pay an extra £100 a month towards your mortgage. This small increase would save you a massive £29,717 in interest over the life of the loan.
Even a tiny extra amount per month can make a huge difference. For example, let’s say you can only afford to pay an extra £20 a month. That still saves you £7,483 in interest – enough to pay off some credit cards, buy a small car, or take a few holidays.
You can use a mortgage overpayment calculator to see how much you would save in interest fees by paying extra on your mortgage.
Cons of early repayment
Paying off your mortgage can potentially drain your savings, leaving you with less cash for other things. Without a proper financial plan, you might end up taking on credit card debt for daily expenses. Or you might find that you can no longer afford other major expenses, including essential home renovations or getting a car.
You might lose out on investments
Perhaps the biggest drawback of paying off your mortgage is that you could lose on investment revenues. High-yield ventures such as the stock market or buying investment properties will earn you more money than you would save by paying off your mortgage early. For example, the S&P 500 stock market index averages 9% yearly – which means putting that money into stocks would earn you double what you could save in interest.
You could be charged a fee
Some banks charge an early repayment fee if you pay off your mortgage before the agreed term. These charges can vary from 1% to 5% of the outstanding balance on your mortgage. Potential fees are always listed on the original mortgage contract you signed.
Things to consider
Before you make a final decision about paying off your mortgage early, look at your current financial situation. If you have high-interest debt, repaying that should come before your mortgage overpayment.
You should also have an emergency fund saved up, especially if paying off your mortgage will deplete your savings.
The next thing to look into is your investment portfolio, including your pension. If you don’t have enough set aside for your future, any extra money you have available should go towards that. Pensions also offer tax relief, so they’re worth contributing to.